A condensed income statement by product line for British Beverage Inc. indicated the following for Royal Cola

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A condensed income statement by product line for British Beverage Inc. indicated the following for Royal Cola for the past year:

Sales …………………………… $254,000

Cost of goods sold ……………… 122,000

Gross profit ……………………. $132,000

Operating expenses ……………… 156,000

Loss from operations ………….. $ (24,000)

It is estimated that 16% of the cost of goods sold represents fixed factory overhead costs and that 20% of the operating expenses are fixed. Since Royal 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 report, dated March 3, 2010, for the proposed discontinuance of Royal Cola.

(b) Should Royal Cola be retained? Explain.

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