Question

Product B has revenue of $39,500, variable cost of goods sold of $25,500, variable selling expenses of $16,500, and fixed costs of $15,000, creating a loss from operations of $17,500.
Required:
1. Prepare a differential analysis as of May 9 to determine if Product B should be continued (Alternative 1) or discontinued (Alternative 2), assuming fixed costs are unaffected by the decision. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.
2.
Determine if Product B should be continued (Alternative 1) or discontinued (Alternative 2).

Amount DescriptionsFixed

Income (loss)

Revenue

Total costs

Variable cost of goods sold

Variable selling and administrative expenses

1. Prepare a differential analysis as of May 9 to determine if Product B should be continued (Alternative 1) or discontinued (Alternative 2), assuming fixed costs are unaffected by the decision. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.

Differential Analysis

Continue Product B (Alternative 1) or Discontinue Product B (Alternative 2)

May 9, 2016

1

Continue Product B

Discontinue Product B

Differential Effect on Income

2

(Alternative 1)

(Alternative 2)

(Alternative 2)

3

4

Costs:

5

6

7

8

9

2. Determine if Product B should be continued (Alternative 1) or discontinued (Alternative 2).

The company is indifferent since the result is the same regardless of which alternative is chosen.

Discontinued

Continued

Answer 1

Answer:

We should discontinue Product B

Explanation:

We should check if Product B generates a contribution or not:

We subtract from the sales revenues the variable cost:

revenue                                   39,500

variable cost of goods sold   (25,500)

variable selling expenses     (16,500)

Contribution                              (2,500)

As the contribution is negative, we should discontinue Product B as is less expensevely to stop production than continue.