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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	255,000
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). If an amount is zero, enter zero "0". Use a minus sign to indicate a loss.

Differential Analysis
Continue Star Cola (Alt. 1) or Discontinue Star Cola (Alt. 2)
January 21
	Continue Star Cola (Alternative 1)	Discontinue Star Cola (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	???	$0	???
Costs:
Variable cost of goods sold	???	???	???
Variable operating expenses	???	???	???
Fixed costs	???	???	???
Income (Loss)	- $49,000	???	???

For continue and discontinue alternatives subtract the costs from the revenue. 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.

b. Should Star Cola be retained? Explain. Yes

As indicated by the differential analysis in part (A), the income would decrease by __$__ if the product is discontinued.

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