Question

A condensed income statement by product line for Celestial Beverage Inc. indicated the following for Star Cola for the past year: Sales $390,000 Cost of goods sold 184,000 Gross profit $206,000 Operating expenses 255,000 Loss from operations $(49,000) It is estimated that 20% of the cost of goods sold represents fixed factory overhead costs and that 30% of the operating expenses are fixed. Because Star 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 January 21 to determine whether Star 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 Star Cola (Alt. 1) or Discontinue Star Cola (Alt. 2) January 21 Continue Star Cola (Alternative 1) Discontinue Star 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.

Answer 1

Star Cola condensed Income statement

Alternative 1: (keep Star Cola Business)

Income statement

Sales $390,000

Less:

Variable factory overheads $147,200

Fixed factory overheads $36,800 Cost of Goods sold $184,000

Gross profit $206,000

Less operating expenses:

Fixed expenses $76,500

Variable expenses $178,500

Operating loss $49,000

Alternative 2. Discontinue star Cola.

Income statement

Sales $0

Less:

Variable factory overheads $0

Fixed factory overheads $36,800 Cost of Goods sold $36,800

Gross profit -$36,800

Less operating expenses:

Fixed expenses $76,500

Variable expenses $0

Operating loss $1,133,000

Differential analysis (discontinue vs Continue)

Income statement

Sales -$390,000

Add Variable factory overheads $147,200

Fixed factory overheads $0

Gross profit/(loss) -$242,800

Fixed expenses $0

Add Variable expenses $178,500

Operating loss $64,300

The operational loss of discontinuing the star cola business is $64,300 ($15,300 worse than when the Business was operational)

Decision: don't discontinue Star Cola.

Answer 2

The answer is in the explanation

Step-by-step explanation:

A) Continue Discontinue Differentiated

Effect on income

Sales 390,000 0 -390,000

Variable cost of goods -147,200 0 147,200

sold

Variable operating -178,500 0 178,500

expense

Fixed cost -113,300 -113,300 0

Income(loss) -49,000 -113,300 -64,300

B. It should be retained since discontinuing further increase the loss