Answer:
Healthy Beverage Inc.
a) Differential Analysis
1) Continue Fruit Cola (Alt. 1)
Sales $12,750,000
Cost of goods sold 8,500,000
Gross profit $4,250,000
Operating expenses 6,000,000
Loss from operations ($1,750,000)
2) Discontinue Fruit Cola (Alt. 2)
Differential Effect on Income (Alternative 2):
Fixed costs:
Cost of goods sold $2,125,000
Operating expenses 900,000
Income (Loss) ($3,025,000)
b. Should Fruit Cola be retained
?
The production and sale of the Fruit Cola should be continued. Discontinuing it would not save the company the incurrence of the fixed cost.
Explanation:
Differential analysis is a managerial accounting technique for analyzing the different costs and benefits that would arise from alternative solutions to a particular problem.
In the above scenario, discontinuing the production and sale of Fruit Cola would not save the company the fixed costs, so the product should be continued. It is not the product that is causing the net loss but allocated fixed costs. Fixed cost is a sunk cost that is not relevant in differential analysis type of decision making.
