A condensed income statement by product line for Celestial Beverage Inc. Indicated the following for Star Cola for the past year: Sales $390,000 Cost of goods sold 184,000 Gross profit $206,000 Operating expenses 255,000 Loss from operations $(49,000) It is estimated that 20% of the cost of goods sold represents fixed factory overhead costs and that 30% of the operating expenses are fixed. Because Star Cola is only one of many products, the fixed costs will not be materiall affected if the product is discontinued. a. Prepare a differential analysis dated January 21 to determine whether Star Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter zero "0". Use a minus sign to indicate a loss. Differential Analysis Continue Star Cola (Alt. 1) or Discontinue Star Cola (Alt. 2) January 21 Differential Effect on Income Continue Star Discontinue Star Cola (Alternative 1) Cola (Alternative 2) (Alternative 2) Revenues Costs: Variable cost of goods sold Variable operating expenses Fixed costs Income (Loss) Feedback Check My Work b. Should Star Cola be retained? Explain. Yes v by $ if the product is discontinued. As indicated by the differential analysis in part (A), the income would decrease v
A condensed income statement by product line for Celestial Beverage Inc. Indicated the following for Star Cola for the past year: Sales $390,000 Cost of goods sold 184,000 Gross profit $206,000 Operating expenses 255,000 Loss from operations $(49,000) It is estimated that 20% of the cost of goods sold represents fixed factory overhead costs and that 30% of the operating expenses are fixed. Because Star Cola is only one of many products, the fixed costs will not be materiall affected if the product is discontinued. a. Prepare a differential analysis dated January 21 to determine whether Star Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter zero "0". Use a minus sign to indicate a loss. Differential Analysis Continue Star Cola (Alt. 1) or Discontinue Star Cola (Alt. 2) January 21 Differential Effect on Income Continue Star Discontinue Star Cola (Alternative 1) Cola (Alternative 2) (Alternative 2) Revenues Costs: Variable cost of goods sold Variable operating expenses Fixed costs Income (Loss) Feedback Check My Work b. Should Star Cola be retained? Explain. Yes v by $ if the product is discontinued. As indicated by the differential analysis in part (A), the income would decrease v
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Concept explainers
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Question
Transcribed Image Text:Differential Analysis for a Discontinued Product
A condensed income statement by product line for Celestial Beverage Inc. indicated the following for Star Cola for the past year:
Sales
$390,000
Cost of goods sold
184,000
Gross profit
$206,000
Operating expenses
255,000
Loss from operations
$(49,000)
It is estimated that 20% of the cost of goods sold represents fixed factory overhead costs and that 30% of the operating expenses are fixed. Because 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 to determine whether Star Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter zero "0". Use a minus sign to indicate a loss.
Differential Analysis
Continue Star Cola (Alt. 1) or Discontinue Star Cola (Alt. 2)
January 21
Differential Effect
Continue Star
Discontinue Star
on Income
Cola (Alternative 1) Cola (Alternative 2)
(Alternative 2)
Revenues
Costs:
Variable cost of goods sold
Variable operating expenses
Fixed costs
Income (Loss)
Feedback
Check My Work
b. Should Star Cola be retained? Explain.
Yes
bý $
if the product is discontinued.
As indicated by the differential analysis in part (A), the income would decrease v
Transcribed Image Text:Decision to Discontinue a Product
On the basis of the following data, the general manager of Foremost Footwear Inc. decided to discontinue Children's Shoes because it reduced income from operations by $10,000. What is the flaw in this decision if it is assumed
that fixed costs would not be materially affected by the discontinuance?
Foremost Footwear Inc.
Product-Line Income Statement
For the Year Ended April 30, 20Y7
Children's
Men's
Women's
Total
Shoes
Shoes
Shoes
Sales
$165,000
$300,000
$500,000 $965,000
Costs of goods sold:
Variable costs
$105,000
$150,000
$220,000 $475,000
Fixed costs
32,000
60,000
120,000
212,000
Total cost of goods sold
$137,000
$210,000
$340,000 $687,000
Gross profit
$28,000
$90,000
$160,000 $278,000
Selling and adminstrative expenses:
Variable selling and admin.
$45,000
$95,000 $161,000
$21,000
expenses
Fixed selling and admin.
17,000
20,000
25,000
62,000
expenses
Total selling and admin.
$38,000
$65,000
$120,000 $223,000
expenses
$(10,000)
$25,000
$40,000
55,000
Income (loss) from operations
would decrease v
by $
If the Children Shoe's are discontinued, the company's income
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