Question - 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 estimates 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.