Question

Cotrone Beverages makes energy drinks in three flavors: Original, Strawberry, and Orange. Company is currently operating at 75 percent of capacity. Worried about the company's performance, the company president is considering dropping the Strawberry flavor. If Strawberry is dropped, the revenue associated with it would be lost and the related variable costs saved. In addition, the company’s total fixed costs would be reduced by 20 percent.
Segmented income statements appear as follows:

Product Original Strawberry Orange
Sales $65,200 $85,600 $102,400
Variable costs 44,000 77,200 80,200
Contribution margin $21,200 $8,400 $22,200
Fixed costs allocated to each product line 9,400 12,000 14,200
Operating profit (loss) $11,800 $(3,600) $8,000

Required:

a. Prepare a differential cost schedule.
b. Should Cotrone drop the Strawberry product line?

Answer 1

Answer:

Yes Strawberry line should be dropped as it reduces the overall profit by$ 3600 when the fixed costs are not 20 %

Yes Strawberry line should be dropped as it reduces the overall profit by$ 1720 even when the fixed costs are  20 %

Explanation:

Cotrone Beverages

Differential Analysis

                          Totals                    Totals             Difference / Change

                      including    (less)   Without   (equals)

                     Strawberry             Strawberry

Sales                           253,200    167,600           85600  Decrease

Variable costs              201,400   124,200          77200    Decrease

Fixed costs allocated  35,600        28,480          7120    Decrease

Operating profit (loss)   13,200       14,920           (1720)     Increase

Working

Total Fixed Costs Reduced will be = 35,600 *20%= 7120

Here we see the profit is increased by 1720 therefore strawberry line should be dropped.

Cotrone Beverages

Differential Analysis

                          Totals                    Totals             Difference / Change

                      including    (less)   Without   (equals)

                     Strawberry             Strawberry

Sales                           253,200    167,600           85600  Decrease

Variable costs              201,400   124,200          77200    Decrease

Contribution margin     51,800       43,400           8,400    Decrease

Fixed costs allocated  35,600        23,600          12000    Decrease

Operating profit (loss)   13,200       16,800           (3,600)   Increase

Yes Strawberry line should be dropped as it reduces the overall profit by$ 3600

Working

We find the totals with and without the strawberry product line and then subtract to find the   differential costs

Cotrone Beverages

Product                        Original             Strawberry       Orange     Total

Sales                            $65,200            $85,600         $102,400   253,200

Variable costs              44,000              77,200             80,200      201,400

Contribution margin $21,200                $8,400          $22,200       51,800

Fixed costs allocated 9,400                  12,000              14,200     35,600

Operating profit (loss) $11,800               $(3,600)           $8,000     13,200

If we drop the strawberry line then the new totals would be

Product                        Original          Orange      Total

Sales                            $65,200       $102,400   167,600

Variable costs              44,000          80,200      124,200

Contribution margin $21,200          $22,200       43,400

Fixed costs allocated 9,400               14,200     23,600

Operating profit (loss) $11,800           $8,000     16,800