Homework SourseA condensed income statement by product line for Healthy Bev
A condensed income statement by product line for Healthy Beverage Inc. indicated the following for Fruit Cola for the past year:
It is estimated that 14% of the cost of goods sold represents fixed factory overhead costs and that 21% 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.
| Sales | $235,000 |
| Cost of goods sold | 109,000 |
| Gross profit | $126,000 |
| Operating expenses | 142,000 |
| Loss from operations | $(16,000) |
Solution
Differential Analysis
Continue Fruit Cola (Alt. 1) or Discontinue Fruit Cola (Alt. 2)
Januray 5
Continue Fruit Cola (Alternative 1)
Discontinue Fruit Cola (Alternative 2)
Differential Effect on Income (Alternative 2)
Revenues
235000
0
-235000
Costs:
0
Variable cost of goods sold
93740
0
-93740
Variable operating expenses
112180
0
-112180
Fixed costs
45080
45080
0
Income (Loss)
-16000
-45080
-29080
The product line should not be discontinued because discontinuing will lead to more loss.
| Differential Analysis | |||
| Continue Fruit Cola (Alt. 1) or Discontinue Fruit Cola (Alt. 2) | |||
| Januray 5 | |||
| Continue Fruit Cola (Alternative 1) | Discontinue Fruit Cola (Alternative 2) | Differential Effect on Income (Alternative 2) | |
| Revenues | 235000 | 0 | -235000 |
| Costs: | 0 | ||
| Variable cost of goods sold | 93740 | 0 | -93740 |
| Variable operating expenses | 112180 | 0 | -112180 |
| Fixed costs | 45080 | 45080 | 0 |
| Income (Loss) | -16000 | -45080 | -29080 |
