1.
Differential Analysis for a Discontinued Product
A condensed income statement by product line for Crown Beverage Inc. indicated the following
for King Cola for the past year:
It is estimated that 13% of the cost of goods sold represents fixed factory overhead costs and that
21% of the operating expenses are fixed. Since King 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, 2014, to determine whether King Cola should
be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter zero
"0".
Differential Analysis
Continue King Cola (Alt. 1) or Discontinue King Cola (Alt. 2)
March 3, 2014
Continue King Cola (Alternative 1)
Discontinue King Cola (Alternative 2)
Differential Effect on Income (Alternative 2)
Revenues
$
$
$
Costs:
Variable cost of goods sold
Variable operating expenses
Fixed costs
Income (Loss)
$
$

2.
$
Sales $236,400
Cost of goods sold 108,000
Gross profit $128,400
Operating expenses 143,000
Loss from operations $(14,600)
Solution
Differential Analysis
Continue
(Alternative 1)
Discontinue
(Alternative 2)
Differential
Effect on Income
(Alternative 2)
Continue
(Alternative 1)
Discontinue
(Alternative 2)
Differential
Effect on Income
(Alternative 2)
Revenues 236400 236400 0
Costs:
Variable Cost of Goods Sold 93960 93960 0

3.
Variable Operating Expenses 112970 112970 0
Fixed Costs 0 44070 (44070)
Income (Loss) 29470 (14600) (44070)