Question

A condensed income statement by product line for British Beverage Inc. indicated the following for King Cola for the past year: Sales $235,100 Cost of goods sold (110,000) Gross profit $125,100 Operating expenses (142,000) Operating loss $(16,900) It is estimated that 12% 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 significantly affected if the product is discontinued. Prepare a differential analysis report for the proposed discontinuance of King Cola.

Answer 1

Answer:

Provided total expenses

Cost of goods sold = $110,000

Variable + Fixed

Provided 12% is fixed = $110,000 X 12% = $13,200

Variable = $110,000 - $13,200 = $96,800

Now in Operating Expenses

Total = $142,000

Fixed = $142,000 X 21% = $29,820

Variable = $142,000 - $29,820 = $112,180

Now if the product King Cola is discontinued then

All the variable cost can be avoided

In that case Net loss will be of Fixed cost

Total fixed cost = $13,200 +$29,820 = $43,020

Whereas current operating loss = $16,900

Now if the input and labor used for King Cola can be allocated to some other beneficial product which can further meet at least $43,020 - $16,900 = $26,120 profit from these additional inputs.

Else the company shall operate on king Cola as in case of operating with the same the loss is only of $16,900 whereas in case of non operation loss = $43,020