A condensed income statement by product line for Garcia Beverages Inc. indicated the following for Melon Cola for the past year:
Sales ............................................. $3,750,000
Cost of goods sold ........................... (2,250,000)
Gross profit .................................... $ 1,500,000
Operating expenses ........................... (1,800,000)
Operating loss ................................. $ (300,000)
It is estimated that 20% of the cost of goods sold represents fixed factory overhead costs and that 35% of the operating expenses are fixed. Since Melon Cola is only one of many products, the fixed costs will not be significantly affected if the product is discontinued.
a. Prepare a differential analysis report for the proposed discontinuance of Melon Cola.
b. Should Melon Cola be retained? Explain.