Question

(LO 44) 448. Dropping Product Lines Cotrone Beverages makes energy drinks in three flavors: Original, Strawberry, and Orange. The company is currently operating at 75 percent of capacity. Worried about the compa ny's performance, the company president is considering dropping the Strawberry flavor. Ir 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 Sales Variable costs....... Contribution margin .......... Fixed costs allocated to each product line... Operating profit (loss). Original $65,200 44,000 $21,200 9,400 $11.800 Strawberry $85,600 77,200 $ 8,400 12,000 $ (3,600) Orange $102,400 80,200 $ 22,200 14,200 $ 8,000 Required Prepare a differential cost schedule like the one in Exhibit 4.8 to indicate whether Cotrone should drop the Strawberry product line. 10

Answer 1

	The Current position of the Company				Amount in $
	Particulars	Original	Strawberry	Orange	Total
	Sales	65,200	85,600	102,400	253,200
	Variable cost	44,000	77,200	80,200	201,400
	Contribution margin	21,200	8,400	22,200	51,800
	Fixed cost allocated to each product line	9,400	12,000	14,200	35,600
	Operating profit/(loss)	11,800	(3,600)	8,000	16,200
	If the Company drops the Strawberry				Amount in $
	Particulars	Original	Strawberry	Orange	Total
	Sales	65,200		102,400	167,600
	Variable cost	44,000		80,200	124,200
	Contribution margin	21,200	-	22,200	43,400
	Fixed cost allocated to each product line	9,400		14,200	23,600
	Operating profit/(loss)	11,800	-	8,000	19,800
	Reduction in fixed cost by 20% (35,600*20%)				7,120
	Operating profit/(loss) after dropping the Strawberry				26,920
	Conclusion:- The Company should drop the Strawberry product as it increases the operating profit by $ 10,720