Differential Analysis for a Discontinued Product A condensed income statement by product line for Warrick Beverage Inc. indicated the following for Mango Cola for the past year: Sales $15,000,000 Cost of goods sold (10,800,000) Gross profit $4,200,000 Operating expenses (8,000,000) Operating loss $(3,800,000) It is estimated that 30% of the cost of goods sold represents fixed factory overhead costs and that 25% of the operating expenses are fixed. Because Mango Cola is only

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 Warrick Beverage Inc. indicated
the following for Mango Cola for the past year:
Sales
$15,000,000
Cost of goods sold
(10,800,000)
Gross profit
$4,200,000
Operating expenses
(8,000,000)
>) Operating loss
$(3,800,000)
It is estimated that 30% of the cost of goods sold represents fixed factory overhead
costs and that 25% of the operating expenses are fixed. Because Mango 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 February 29 to determine whether Mango
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 Analysis
Continue (Alt. 1) or Discontinue (Alt. 2) Mango Cola
February 29
Continue
Discontinue
Differential
Mango Cola
Effects
Mango Cola
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues
Costs:
Variable cost of goods sold
Variable operating expenses
Fixed costs
Profit (Loss)
b. Should Mango Cola be retained?
Transcribed Image Text:Differential Analysis for a Discontinued Product A condensed income statement by product line for Warrick Beverage Inc. indicated the following for Mango Cola for the past year: Sales $15,000,000 Cost of goods sold (10,800,000) Gross profit $4,200,000 Operating expenses (8,000,000) >) Operating loss $(3,800,000) It is estimated that 30% of the cost of goods sold represents fixed factory overhead costs and that 25% of the operating expenses are fixed. Because Mango 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 February 29 to determine whether Mango 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 Analysis Continue (Alt. 1) or Discontinue (Alt. 2) Mango Cola February 29 Continue Discontinue Differential Mango Cola Effects Mango Cola (Alternative 1) (Alternative 2) (Alternative 2) Revenues Costs: Variable cost of goods sold Variable operating expenses Fixed costs Profit (Loss) b. Should Mango Cola be retained?
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