A condensed income statement by product line for Crown Beverage Inc. indicated the following for Royal Cola for the past year: Sales $236,700 Cost of goods sold 111,000 Gross profit Operating expenses Loss from operations $125,700 144,000 $(18,300) It is estimated that 16% of the cost of goods sold represents fixed factory overhead costs and that 19% of the operating expenses are fixed. Since Royal Cola is only one of many products, the fixed costs will not be materially affected if the discontinued. a. Prepare a differential analysis, dated March 3, to determine whether Royal 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 Revenues Costs: Continue Royal Cola (Alt. 1) or Discontinue Royal Cola (Alt. 2) Variable cost of goods sold Variable operating expenses January 21 Continue Royal Discontinue Royal Cola (Alternative 1) Cola (Alternative 2) 236,700✓ Differential Effect on Income (Alternative 2) 236,700 Fixed costs Income (Loss)

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Chapter1: Financial Statements And Business Decisions
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Differential Analysis for a Discontinued Product
A condensed income statement by product line for Crown Beverage Inc. indicated the following for Royal Cola for the past year:
Sales
$236,700
Cost of goods sold
111,000
Gross profit
Operating expenses
Loss from operations
$125,700
144,000
$(18,300)
It is estimated that 16% of the cost of goods sold represents fixed factory overhead costs and that 19% of the operating expenses are fixed. Since Royal 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 Royal 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.
Revenues
Differential Analysis
Continue Royal Cola (Alt. 1) or Discontinue Royal Cola (Alt. 2)
January 21
Continue Royal
Discontinue Royal
Cola (Alternative 1) Cola (Alternative 2)
236,700
Differential Effect
on Income
(Alternative 2)
236,700
Costs:
Variable cost of goods sold
Variable operating expenses
Fixed costs
Income (Loss)
Feedback
x
X
x
▼Check My Work
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.
Transcribed Image Text:Differential Analysis for a Discontinued Product A condensed income statement by product line for Crown Beverage Inc. indicated the following for Royal Cola for the past year: Sales $236,700 Cost of goods sold 111,000 Gross profit Operating expenses Loss from operations $125,700 144,000 $(18,300) It is estimated that 16% of the cost of goods sold represents fixed factory overhead costs and that 19% of the operating expenses are fixed. Since Royal 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 Royal 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. Revenues Differential Analysis Continue Royal Cola (Alt. 1) or Discontinue Royal Cola (Alt. 2) January 21 Continue Royal Discontinue Royal Cola (Alternative 1) Cola (Alternative 2) 236,700 Differential Effect on Income (Alternative 2) 236,700 Costs: Variable cost of goods sold Variable operating expenses Fixed costs Income (Loss) Feedback x X x ▼Check My Work 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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