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

2 

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.