.
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 sold | 110,000 |
| Gross profit | $124,800 |
| Operating expenses | 143,000 |
| 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.
