Answer:
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.
