Chapter 11, Problem 3E

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:

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.

1. a. Prepare a differential analysis dated February 29 to determine whether Mango Cola should be continued (Alternative 1) or discontinued (Alternative 2).
2. b. Should Mango Cola be retained? Explain.