27th Edition
WARREN + 5 others
ISBN: 9781337272094




27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Differential analysis for a discontinued product

The condensed product-line income statement for Dish N’ Dat Company for the month of May is as follows:

Dish N’ Dat Company Product-Line Income Statement For the Month Ended May 31
  Bowls Plates Cups
Sales $71,000 $105,700 $33,500
Cost of goods sold 32,600 42300 20,600
Gross profit $38,400 $ 63,400 $12,900
Selling and administrative expenses 27,400 42,800 17,200
Income from operations $11,000 $ 20,600 $(4,300)

Fixed costs are 15% of the cost of goods sold and 30% of the selling and administrative expenses. Dish N’ Dat assumes that fixed costs would not be materially affected if the Cups line were discontinued.

a. Prepare a differential analysis dated May 31 to determine if Cups should be continued (Alternative 1) or discontinued (Alternative 2).

b. Should the Cups line be retained? Explain.


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 for Company DD, as on May 31.


The differential analysis for Company DD, as on May 31, is shown below.

Differential Analysis of Company DD
Continue Cups (Alt. 1) or Discontinue Cups (Alt. 2)
May 31
Continue Cups  (Alternative 1) Discontinue Cups  (Alternative 2) Differential Effect on income
Revenues $33,500 $0 (-)  $33,500
Variable costs of goods sold (1) (-)  $17,510 $17,510
Variable selling and administrative expenses (2) (-)  $12,040 $12,040
Fixed Costs (3)  (-)  $8,250 (-)  $8,250
Income (loss) (-)  $4,300 (-)  $8,250 (-)  $3,950

Table (1)

The differential analysis of the Company DD shows that both retaining and discontinuing the cups results in operating loss; however the loss is less when the cups are retained.

Working Note:

Calculate the variable costs of goods sold of the cups.

Variable Cost = Total Fixed Cost Fixed Cost=$20,600 ($20,600×15%)=$20,600$3,090=$17,510


Calculate the variable selling and administrative expenses of the cups


To determine
Whether to retain the cups line.

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