A condensed income statement by product line for Celestial Beverage Inc. indicated the following for Star Cola for the past year:
Sales .............. $ 290,000
Cost of goods sold ......... 155,000
Gross profit ............ $ 135,000
Operating expenses ........ 207,000
Loss from operations ....... $ (72,000)
It is estimated that 15% of the cost of goods sold represents fixed factory overhead costs and that 25% of the operating expenses are fixed. Since 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, 2014, to determine whether Star Cola should be continued (Alternative 1) or discontinued (Alternative 2).
b. Should Star Cola be retained? Explain.