A condensed income statement by product line for Canadian Beverage Inc. indicated the following for Lemon Mist for the past year:
|
Sales |
$362,000 |
|
Cost of goods sold |
185,000 |
|
Gross profit |
$177,000 |
|
Operating expenses |
215,000 |
|
Loss from operations |
$ (38,000) |
It is estimated that 23% of the cost of goods sold represents fixed factory overhead costs and that 27% of the operating expenses are fixed. Since Lemon Mist 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 January 3, 2008, for the proposed discontinuance of Lemon Mist.
b. Should Lemon Mist be retained? Explain.