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. A condensed income statement by product line for Crown Beverage Inc. indicated the following for King...

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Accounting

.

A condensed income statement by product line for Crown BeverageInc. indicated the following for King Cola for the past year:

Sales$234,800
Cost of goods sold110,000
Gross profit$124,800
Operating expenses143,000
Loss from operations$(18,200)

It is estimated that 15% of the cost of goods sold representsfixed factory overhead costs and that 19% of the operating expensesare fixed. Since King Cola is only one of many products, the fixedcosts will not be materially affected if the product isdiscontinued.

a. Prepare a differential analysis, dated March3, to determine whether King Cola should be continued (Alternative1) or discontinued (Alternative 2). If an amount is zero, enterzero "0". Use a minus sign to indicate a loss.

Differential Analysis
Continue King Cola (Alt. 1) or Discontinue KingCola (Alt. 2)
January 21
Continue King
Cola (Alternative 1)		Discontinue King
Cola (Alternative 2)		Differential Effect
on Income
(Alternative 2)
Revenues$$$
Costs:
Variable cost of goods sold
Variable operating expenses
Fixed costs
Income (Loss)$$$

b. Should Star Cola be retained?Explain.

As indicated by the differential analysis in part (A), theincome would   by $ if the product isdiscontinued.

Answer & Explanation Solved by verified expert
4.0 Ratings (850 Votes)

a.
Total cost Fixed cost Variable expense

Cost of goods sold

110000

16500

[ 110000*15% ]

93500

[ 110000-16500 ]

Operating expense

143000

27170

[ 143000*19% ]

115830

[ 143000-27170 ]
Total 253000 43670 209330
Differential analysis
Continue King Cola (Alt.1) or Discontinue King Cola (Alt. 2)
January 21
Continue King Cola (Alternative 1) Discontinue King Cola (Alternative 2) Differential effect on income (Alternative 2)
Revenues 234800 0 -234800
Costs :
Variable cost of goods sold 93500 0 93500
Variable operating expenses 115830 0 115830
Fixed costs 43670 43670 0
Income (loss) -18200 -43670 -25470
b.
Should Star Cola be retained ?
Answer : Yes
As indicated by the differential analysis in part (A), the net income would decrease by $25470 if the product is discontinued.

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