A condensed income statement by product line for Lavonia Beverage Inc. indicated the following for Vim Cola for the past year: Line Item Description Amount Sales $237,700  Cost of goods sold (110,000) Gross profit $127,700  Operating expenses (144,000) Operating loss $(16,300)

FINANCIAL ACCOUNTING
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ISBN:9781259964947
Author:Libby
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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 Lavonia Beverage Inc. indicated the following for Vim Cola for the past year:

Line Item Description Amount
Sales $237,700 
Cost of goods sold (110,000)
Gross profit $127,700 
Operating expenses (144,000)
Operating loss $(16,300)

It is estimated that 15% of the cost of goods sold represents fixed factory overhead costs and that 23% of the operating expenses are fixed. Because Vim Cola is only one of many products, the fixed costs will not be materially affected if the product is discontinued.

Question Content Area

a.  Prepare a differential analysis dated November 2 to determine whether Vim Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.

Differential AnalysisContinue (Alt. 1) or Discontinue (Alt. 2) Vim ColaNovember 2
Line Item Description Continue
Vim Cola
(Alternative 1)
Discontinue
Vim Cola
(Alternative 2)
Differential
Effects
(Alternative 2)
Revenues $Revenues $Revenues $Revenues
Costs:      
Variable cost of goods sold Variable cost of goods sold Variable cost of goods sold Variable cost of goods sold
Variable operating expenses Variable operating expenses Variable operating expenses Variable operating expenses
Fixed costs Fixed costs Fixed costs Fixed costs
Profit (loss) $Profit (loss) $Profit (loss) $Profit (loss)
 

Question Content Area

b.  Should Vim Cola be retained?

 
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