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 15 percent. Segmented Income statements appear as follows: Product Sales Variable costs Contribution margin Fixed costs allocated to each product line Operating profit (loss) Original $32,800 22,960 $ 9,840 4,609 $ 5,249 Strawberry $42,780 38,430 $ 4,270 5,80€ $(1,530) Orange $51,600 41,280 $10,320 6,909 $ 3,420 Required: a. Prepare a differential cost schedule. Status Quo Alternative: Drop Strawberry Difference (all lower under the alternative) Revenue Less: Variable costs Contribution margin Less: Fixed costs Operating profit (loss) b. Should Cotrone drop the Strawberry product line? Yes NO

Answer 1

a. Differential cost schedule: D A в с Alternative Difference (all lower Status Quo Drop .. under the alternative) Strawberry 2 Revenue $1,27,100 $ 84,400 $ -42,700 3 Less: Variable costs $1,02,670 $ 64,240 $ -38,430 4 Contribution Margin $ 24,430 $ 20,160 $ - 4.270 5 Less: Fixed costs $ 17,300 $ 14,705 S -2,595 6 Operating Profit (Loss) $ 7,130 $ 5,455 $ -1,675 Calculations: A B с D Status Quo Alternative Drop Strawberry Difference (all lower under the alternative) 2 Revenue =32800+42700+51600 =32800+51600 3 Less: Variable costs =22960+38430+41280 =22960+41280 4 Contribution Margin =B2-B3 =C2-C3 5 Less: Fixed costs =4600+5800+6900 =B5%85% 6 Operating Profit (Loss) =B4-B5 _=C4-C5 =C2-B2 =C3-B3 =C4-B4 =C5-B5 =C6-B6 No, strawberry division should not be dropped as it reduces the overall operating income by $1675.

For any queries or doubts related to format or any values please post in comment section, I would take that up.