# Differential analysis for a discontinued product A condensed income statement by product line for Celestial Beverage Inc. indicated the following for Star Cola for the past year: Sales $390,000 Cost of goods sold 184,000 Gross profit$206,000 Operating expenses 55,000 Loss from operations $(49,000) It is estimated that 20% of the Cost of goods sold represents fixed factory overhead costs and that 30% of the operating expenses are fixed. Because Star Cola is only one of many products, the fixed costs will not be materially affected if the product is discontinued. a. Prepare a differential analysis dated January 21 to determine whether Star Cola should be continued (Alternative 1) or discontinued (Alternative 2). b. Should Star Cola be retained? Explain. BuyFind ### Accounting 27th Edition WARREN + 5 others Publisher: Cengage Learning, ISBN: 9781337272094 BuyFind ### Accounting 27th Edition WARREN + 5 others Publisher: Cengage Learning, ISBN: 9781337272094 #### Solutions Chapter Section Chapter 25, Problem 25.3EX Textbook Problem ## Differential analysis for a discontinued productA condensed income statement by product line for Celestial Beverage Inc. indicated the following for Star Cola for the past year: Sales$390,000 Cost of goods sold 184,000 Gross profit $206,000 Operating expenses 55,000 Loss from operations$ (49,000) It is estimated that 20% of the Cost of goods sold represents fixed factory overhead costs and that 30% of the operating expenses are fixed. Because Star Cola is only one of many products, the fixed costs will not be materially affected if the product is discontinued.a.    Prepare a differential analysis dated January 21 to determine whether Star Cola should be continued (Alternative 1) or discontinued (Alternative 2).b.    Should Star Cola be retained? Explain.

Expert Solution

a)

To determine

Differential Analysis: Differential analysis refers to the analysis of differential revenue that could be gained or differential cost that could be incurred from the available alternative options of business.

To Prepare: The differential analysis of Company CB as on January 21.

### Explanation of Solution

The differential analysis of income from both alternatives is shown below.

 Differential Analysis for Company CB Continue (Alt. 1) or Discontinue (Alt. 2), Product SC January 21 Continue Product SC  (Alternative 1) Discontinue Product SC  (Alternative 2) Differential effect on income Revenues $390,000$0 (-)  \$390,000 Costs Variable Cost of goods (1) (-)�...
Expert Solution

b)

To determine

To Advise: Whether the production of Product SC should be retained.

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