Differential Analysis for a Discontinued Product
A condensed income statement by product line for Healthy Beverage Inc. indicated the following for Fruit Cola for the past year:
|Cost of goods sold||111,000|
|Loss from operations||$(19,900)|
It is estimated that 15% of the cost of goods sold represents fixed factory overhead costs and that 22% of the operating expenses are fixed. Because Fruit 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 5 to determine whether Fruit Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter “0”. Use a minus sign to indicate a loss.
|Continue Fruit Cola (Alt. 1) or Discontinue Fruit Cola (Alt. 2)|
|Continue Fruit Cola (Alternative 1)||Discontinue Fruit Cola (Alternative 2)||Differential Effect on Income (Alternative 2)|
|Variable cost of goods sold|
|Variable operating expenses|
For continue and discontinue alternatives subtract the costs from the revenues. Use percentages to separate variable from fixed costs. Determine the differential effect on income of the revenues, costs, and income (loss) by subtracting alternative 2 from alternative 1.
Learning Objective 1.