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Problem - Differential Analysis for a Discontinued Product
A condensed income statement by product line for Crown Beverage Inc. indicated the following for King Cola for the past year:
Sales
$235,000
Cost of goods sold
110,000
Gross profit
$125,000
Operating expenses
144,000
Loss from operations
$ (19,000)
It is estimated that 16% of the cost of goods sold represents fixed factory overhead costs and that 20% of the operating expenses are fixed. Since King Cola is only one of many products, the fixed costs will not be materially affected if the product is discontinued.
Required -
a. Prepare a differential analysis, dated March 3, 2012, to determine whether King Cola should be continued (Alternative 1) or discontinued (Alternative 2).
b. Should King Cola be retained? Explain.
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Denver Technologies Corp. (DTC) is a provider of Information Technology services for small and medium companies in the Denver, CO, area.
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