Question

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 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 $32.300 22.610 $ 9.690 4,100 $5.590 Strawberry $42.700 38, 430 $ 4,270 6,400 $(2,130) Orange $50.900 40,720 $10.180 6,900 $ 3,280 Required: a. Prepare a differential cost schedule. (Select option "increase" or "decrease", keeping Status Quo as the base. Select "none" if there is no effect.) Status Quo Alternative Drop Strawberry Difference Revenue Less: Variable costs Contribution margin Less: Fixed costs Operating profit (los)

Answer 1

Differential cost schedule
	Status Quo	Alternative	Difference
Revenue	125900	83200	42700	Decrease
Less: Variable costs	101760	63330	38430	Decrease
Contribution Margin	24140	19870	4270	Decrease
Less: Fixed costs	17400	14790	2610	Decrease
Operating Profit	6740	5080	1660	Decrease
Should not drop, as income will reduce

1 Differential cost schedule 2 3 Revenue 4 Less: Variable costs 5 Contribution Margin 6 Less: Fixed costs 7 Operating Profit Status Quo Alternative Difference =32300+42700+50900 =B3-42700 1=B3-C3 Decrease =22610+38430+40720 =B4-38430 =B4-C4 Decrease =B3-B4 =C3-C4 =B5-C5 Decrease P=4100+6400+6900 =B6*85% =B6-C6 Decrease =B5-B6 =C5-C6 =B7-C7 Decrease 9 Should not drop, as income will reduce