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 80 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 $ 33,900 $ 44,000 $ 52,400 Variable costs 22,400 39,400 40,900 Contribution margin $ 11,500 $ 4,600 $ 11,500 Fixed costs allocated to each product line 5,500 6,800 7,900 Operating profit (loss) $ 6,000 $ 2,200 $ 3,600 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

Answer with working notes is given below

Sales Variable cost Contribution Margin Fixed Cost Net profit Broth $33,900 $22,400 $11,500 $5,500 $6,000 Beef Barley Minestrone $44,000 $52,400 $39,400 $40,900 $4,600 $11,500 $6,800 $7,900 $2,200 $3,600 Total $130,300 $102,700 $27,600 $20,200 $7,400 Existing Status quo Sales Variable cost Contribution Margin Fixed Cost Net profit $130,300 $102,700 $27,600 $20,200 $7,400 Proposed Drop Beef Differential Barley $86,300 $44,000 $63,300 $39,400 $23,000 $4,600 $15,150 $5,050 $7,850 $450 Revised Fixed cost 75% of $20,200 a-2 Beef Barley line should be dropped since there will be increase overall profit b-1 Existing Sales Variable cost Contribution Margin Fixed Cost Net profit Proposed Drop Beef Differential Status quo Barley $130,300 $81,985 $48,315 $102,700 $60,135 $42,565 $27,600 $21,850 $5,750 $20,2001 $15,150 $5,050 $7,400 $6,700 | $700 b-2 There is drop in profit because of sales loss in Broth and Minestrone Hence it is recommended to continue selling Beef Barley and maintain existing profit Working notes Revised product line statement Broth Sales-5% lower $32,205 Variable cost $21,280 Minestrone $49,780 $38,855 Total $81,985 $60,135