Question

Problem 4-59 Decision Whether to Add or Drop (LO 4-4)

O’Neil Enterprises produces a line of canned soups for sale at supermarkets across the country. Demand has been “soft” recently and the company is operating at 70 percent of capacity. The company is considering dropping one of the soups, beef barley, in hopes of improving profitability. If beef barley is dropped, the revenue associated with it will be lost and the related variable costs saved. The CFO estimates that the fixed costs will also be reduced by 25 percent.

The following product line statements are available:

Product	Broth			Beef Barley			Minestrone
Sales	$	36,300		$	46,400		$	54,800
Variable costs		23,200			41,000			42,500
Contribution margin	$	13,100		$	5,400		$	12,300
Fixed costs allocated to each product line		7,100			8,400			9,500
Operating profit (loss)	$	6,000		$	(3,000)		$	2,800

Required:

a-1. Complete the following differential cost schedule.

a-2. From an operating profit perspective, should O'Neil drop the beef barley line?

	Yes
	No

b. When the product manager for the minestrone soup hears that managers are considering dropping the beef barley line, she points out that many O’Neil customers buy more than one soup flavor and if beef barley is not available from O’Neil, some of them might stop buying the other soups as well. She estimates that 5 percent of the current sales of both broth and minestrone will be lost if beef barley is dropped.

b-1. Complete the following differential cost schedule.

b-2. Based on the estimate from the project manager, should O'Neil drop the beef barley line?

	Yes
	No

Answer 1

The answer has been presented in the supporting sheet. All the parts has been solved with detailed explanation and calculation. For detailed answer refer to the supporting sheet.

Answer Requirement 1) a) Status Qua Revenue Less variable costs contribution margin Less fixed costs 137500 106700 30800 25000 Difference (all lower Alternative drop beef barley. under the alternative 91100 -46400 65700 41000 25400 -5400 22900 2100 (6300+8700+(7600*75%)) 2500 -3300 operating profit/(loss) | 5800 b) The correct answer is 5 Yes As it leads to additional loss of $ 3300 if drop the beef barley

19 Requirement 2) 20 a) Status Qua Alternative drop beef barley Difference (all lower under the alternative L -50955 22 Revenue 137500 86545 ((36300*0.95)+(54800*0.95)) 24 Less variable costs 106700 44285 26 contribution margin 27 Less fixed costs 30800 25000 62415 ((23200+42500) *0.95) 24130 22900 (6300+8700+(7600*75%)) -6670 2100 29 operating profit/(loss) 5800 -4570 31 b) 32 The correct answer is 33 Yes 35 as it leads to loss of $ 4570 if drop the beef barley 36 37 For any help please comment in the comment box 38 Thank You