Friday, November 9, 2018

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

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

Sales $290,000
Cost of goods sold   155,000
Gross profit $135,000
Operating expenses 207,000
Loss from operations $ (72,000)


It is estimated that 15% of the cost of goods sold represents fixed factory overhead costs and that 25% of the operating expenses are fixed. Since 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, 2014, to determine whether Star Cola should be continued (Alternative 1) or discontinued (Alternative 2).

b. Should Star Cola be retained? Explain.


Answer:

a. Differential Analysis 
Continue Star Cola (Alt. 1) or Discontinue Star Cola (Alt. 2) 
January 21, 2014 
Continue Star 
Cola 
(Alternative 1) 
Discontinue 
Star Cola 
(Alternative 2) 
Revenues $290,000 $ 0 –$290,000 
Costs:    
Variable cost of goods sold –131,7501
 0
 131,750 
Variable operating expenses –155,250

0 155,250 
Fixed costs –75,0003
 –
75,000 0 
Income (Loss) –$  72,000 –$75,000 –$ 3,000 
    
(1 – 15%) × $155,000 
(1 – 25%) × $207,000 
(15% × $155,000) + (25% × $207,000) 
b. Star Cola should be retained. As indicated by the differential analysis in part 
(a), the income would decrease by $3,000 if the product is discontinued. 

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