Accounting 26th Edition by Carl Warren ,Jim Reeve ,Jonathan Duchac

Exercise 29

Differential analysis for a discontinued product
A condensed Income statement by product line for Celestial Beverage Inc. indicated the following for star Cola for the past year:

It is estimated that 20% of the cost of goods sold represents fixed factory overhead costs and that 30% of the operating expenses are fixed. Because 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 to determine whether Star Cola should be continued (Alternative 1) or discontinued (Alternative 2).
b. Should Star Cola be retained Explain.