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

Sales................................$12,750,000

Cost of goods sold..................8,500,000

Gross profit........................$ 4,250,000

Operating expenses..................6,000,000

Loss from operations............$ (1,750,000)

It is estimated that 25% of the cost of goods sold represents fixed factory overhead costs and that 15% of the operating expenses are fixed. Because Fruit 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 5 to determine whether Fruit Cola should be continued (Alternative 1) or discontinued (Alternative 2).

B. Should Fruit Cola be retained? Explain.