Question

A condensed income statement by product line for Crown Beverage Inc. indicated the following for Royal...

A condensed income statement by product line for Crown Beverage Inc. indicated the following for Royal Cola for the past year:

 Sales \$233,100 Cost of goods sold 110,000 Gross profit \$123,100 Operating expenses 145,000 Loss from operations \$(21,900)

It is estimated that 15% of the cost of goods sold represents fixed factory overhead costs and that 21% 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.

 Differential Analysis Continue Royal Cola (Alt. 1) or Discontinue Royal Cola (Alt. 2) January 21 Continue Royal Cola (Alternative 1) Discontinue Royal Cola (Alternative 2) Differential Effect on Income (Alternative 2) Revenues \$ \$ \$ Costs: Variable cost of goods sold Variable operating expenses Fixed costs Income (Loss) \$ \$ \$

b. Should Star Cola be retained? Explain.

As indicated by the differential analysis in part (A), the income would   by \$ 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.

 Differential Analysis Continue Royal Cola (Alt. 1) or Discontinue Royal Cola (Alt. 2) January 21 Continue Royal Cola (Alternative 1) Discontinue Royal Cola (Alternative 2) Differential Effect on Income (Alternative 2) Revenues \$233100 \$0 -233100 Costs: Variable cost of goods sold 110000*85% = -93500 0 93500 Variable operating expenses 145000*79% = -114550 0 114550 Fixed costs -46950 -46950 0 Income (Loss) -21900 -46950 -25050

b) As indicated by the differential analysis in part (A), the income would Decrease by \$25050 if the product is discontinued.

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