Question

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	$	38,100			$	48,200			$	56,600
Variable costs		23,800				42,200				43,700
Contribution margin	$	14,300			$	6,000			$	12,900
Fixed costs allocated to each product line		8,300				9,600				10,700
Operating profit (loss)	$	6,000			$	3,600			$	2,200

Required:

a-1. Complete the following differential cost schedule.

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

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?

Answer 1

Differential Cost Schedule
	Status Quo	Alternative	Difference
Revenue	142,900	94,700	-48,200
Less: VC	109,700	67,500	-42,200
Contribution Margin	33,200	27,200	-6,000
Less: Fixed Costs	28,600	21,450	-7,150
Operating Profit(Loss)	4,600	5,750	1,150
YES, since profit will increase by $1150
b-1
Differential Cost Schedule
	Status Quo	Alternative	Difference
Revenue	142,900	89,965	-52,935
Less: VC	109,700	64,125	-45,575
Contribution Margin	33,200	25,840	-7,360
Less: Fixed Costs	28,600	21,450	-7,150
Operating Profit(Loss)	4,600	4,390	-210
b-2 No, as profit will reduce by $210

Ε в c 1 Differential Cost Schedule 2 Status Quo Alternative Difference 3 Revenue =38100+48200+56600 =38100+56600 =C3-B3 4 Less: VC =23800+42200+43700 =B4-42200 =C4-B4 5 Contribution Margin =B3-B4 =C3-C4 =C5-B5 6 Less: Fixed Costs =8300+9600+10700 =B6*75% =C6-B6 7 Operating Profit(Loss) =B5-B6 =C5-C6 =CZ-B7 8 YES, since profit will increase by $1150 9 10 b-1 11 Differential Cost Schedule 12 Status Quo Alternative Difference 13 Revenue =B3 =C3-(38100+56600)*5% =C13-B13 14 Less: VC =B4 =C4-(23800+43700)*5% =C14-B14 15 Contribution Margin =B5 =C13-C14 =C15-B15 16 Less: Fixed Costs =B6 =C6 =C16-B16 17 Operating Profit(Loss) =B7 =C15-C16 =C17-B17 18 b-2 No, as profit will reduce by $210