Reference no: EM132708124

Problem - Differential Analysis Report for a Discontinued Product

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.

Required -

a. Prepare a differential analysis report for the proposed discontinuance of Melon Cola.

b. Should Melon Cola be retained? Explain.