A condensed income statement by product line for Canadian Beverage Inc. indicated the following for Lemon Mist for the past year:

Sales ........ $ 362,000

Cost of goods sold .... 185,000

Gross profit ....... $177,000

Operating expenses .... 215,000

Loss from operations ... $ (38,000)

It is estimated that 23% of the cost of goods sold represents fixed factory overhead costs and that 27% of the operating expenses are fixed. Since Lemon Mist is only one of many products, the fixed costs will not be materially affected if the product is discontinued.

a. Prepare a differential analysis report, dated January 3, 2008, for the proposed discontinuance of Lemon Mist.

b. Should Lemon Mist be retained? Explain.