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 $ 36,300 $ 46,400 $ 54,800 Variable costs 23,200 41,000 42,500 Contribution margin $ 13,100 $ 5,400 $ 12,300 Fixed costs allocated to each product line 7,100 8,400 9,500 Operating profit (loss) $ 6,000 $ 3,000 $ 2,800 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:

Differential Cost Schedule
	Status Quo	Alternarive	Difference
Revenue	137,500	91,100	- 46,400
Less: Variable Cost	106,700	65,700	- 41,000
Contribution Margin	30,800	25,400	- 5,400
Less: Fixed Cost	25,000	18,750	-6,250
a-1) Operating Profit (Loss)	5,800	6,650	850
a-2) YES, Since profit will increase by $ 850

b-1

Differential Cost Schedule
	Status Quo	Alternarive	Difference
Revenue	137,500	86,545	- 50,955
Less: Variable Cost	106,700	62,415	- 44,285
Contribution Margin	30,800	24,130	- 6,670
Less: Fixed Cost	25,000	18,750	-6,250
Operating Profit (Loss)	5,800	5,380	- 420
b-2 ) NO, Since thr profit will be reduced by $ 420