A condensed income statement by product line for British Beverage Inc. indicated the following for King Cola for the past year: Sales $237,400 Cost of goods sold 110,000 Gross profit $127,400 Operating expenses 143,000 Loss from operations $(15,600) It is estimated that 13% of the cost of goods sold represents fixed factory overhead costs and that 23% of the operating expenses are fixed. Since King 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 March 3, to determine whether King 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 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 $fill in the blank 79755f06df91fd2_1 $fill in the blank 79755f06df91fd2_2 $fill in the blank 79755f06df91fd2_3 Costs: Variable cost of goods sold fill in the blank 79755f06df91fd2_4 fill in the blank 79755f06df91fd2_5 fill in the blank 79755f06df91fd2_6 Variable operating expenses fill in the blank 79755f06df91fd2_7 fill in the blank 79755f06df91fd2_8 fill in the blank 79755f06df91fd2_9 Fixed costs fill in the blank 79755f06df91fd2_10 fill in the blank 79755f06df91fd2_11 fill in the blank 79755f06df91fd2_12 Income (Loss) $fill in the blank 79755f06df91fd2_13 $fill in the blank 79755f06df91fd2_14 $fill in the blank 79755f06df91fd2_15 b. Should Star Cola be retained? Explain. As indicated by the differential analysis in part (A), the income would by $fill in the blank 9b439407ef91fbe_3 if the product is discontinued.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
A condensed income statement by product line for British Beverage Inc. indicated the following for King Cola for the past year:
| Sales | $237,400 |
| Cost of goods sold | 110,000 |
| Gross profit | $127,400 |
| Operating expenses | 143,000 |
| Loss from operations | $(15,600) |
It is estimated that 13% of the cost of goods sold represents fixed
a. Prepare a differential analysis, dated March 3, to determine whether King 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 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 | $fill in the blank 79755f06df91fd2_1 | $fill in the blank 79755f06df91fd2_2 | $fill in the blank 79755f06df91fd2_3 |
| Costs: | |||
| Variable cost of goods sold | fill in the blank 79755f06df91fd2_4 | fill in the blank 79755f06df91fd2_5 | fill in the blank 79755f06df91fd2_6 |
| Variable operating expenses | fill in the blank 79755f06df91fd2_7 | fill in the blank 79755f06df91fd2_8 | fill in the blank 79755f06df91fd2_9 |
| Fixed costs | fill in the blank 79755f06df91fd2_10 | fill in the blank 79755f06df91fd2_11 | fill in the blank 79755f06df91fd2_12 |
| Income (Loss) | $fill in the blank 79755f06df91fd2_13 | $fill in the blank 79755f06df91fd2_14 | $fill in the blank 79755f06df91fd2_15 |
b. Should Star Cola be retained? Explain.
As indicated by the differential analysis in part (A), the income would by $fill in the blank 9b439407ef91fbe_3 if the product is discontinued.
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