Problem:
A condensed income statement by product line for Celestial Beverage Inc. indicated the following for Star Cola for the past year:
Sales $290,000 minus Cost of goods sold 155,000 equals' Gross profit of $135,000 minus operating expenses 207,000 equals the loss from operation $(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 the many products, the fixed costs will not be materially affected if the product is discontinued.
Required:
Question 1: Prepare a differential analysis, dated January 21, 2014, to determine whether Star Cola should be continued (Alternative 1) or discontinued (Alternative 2)
Question 2: Should Star Cola be retained? Explain
Note: Please show how you came up with the solution.