Question

valus: 2.85 points O'Nell Enterprises produces a line of canned soups tor sale at supermarkets across the country. Demand has been soft recently and the company is operating at 70 percent of capacity. The company is conslcerng droppling 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 fo lowing product line staternents are available: Produc Gales Variable costs Hroth Beet Baney Minestrone 535,300 46.400 11,000 354,000 12.500 Contribution margin 7,100 6,000 S3 000) 9,500 S2,800 「xed costs allocated to each product line Operating profit (loss) Required: a-1. Complete the to lowing dtterential cost schedule. Status Quo Alternative under Beef Barley the a Revenue Less. Variable cosls Contnhuton margin Less:「xed costs Operating profit (oss

Answer 1

a-1.

	Status Quo	Alternative: Drop Beef Barley	Difference (all lower under the alternative)
Revenue	137500	91100	-46400
Less: Variable costs	106700	65700	-41000
Contribution margin	30800	25400	-5400
Less: Fixed costs	25000	18750	-6250
Operating profit (loss)	5800	6650	850

a-2. Yes

Since dropping the beef barley line would result in an increase in operating profit by $850.

b-1.

	Status Quo	Alternative: Drop Beef Barley	Difference (all lower under the alternative)
Revenue	137500	86545	-50955
Less: Variable costs	106700	62415	-44285
Contribution margin	30800	24130	-6670
Less: Fixed costs	25000	18750	-6250
Operating profit (loss)	5800	5380	-420

b-2. No

Since the operating profit would decrease by $420.

Note: The decrease in variable expenses is considered to be in-line with the decrease in sales and hence the same are also reduced by 5%. Fixed costs are considered reduced by 25% as given when beef barley line is dropped.