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	Original				Strawberry				Orange
Sales	$	32,700			$	43,500			$	50,900
Variable costs		22,890				39,150				40,720
Contribution margin	$	9,810			$	4,350			$	10,180
Fixed costs allocated to each product line		4,800				5,600				7,900
Operating profit (loss)	$	5,010			$	(1,250	)		$	2,280

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	alternative: drop strawberry	difference	increase or decrease
revenue
less: variable costs
contribution margin
less: fixed costs
operating profit (loss)

b. Should Cotrone drop the Strawberry product line?

• Yes

• No

Answer 1

a.

Fixed cost (status quo) = 4,800 + 5,600 + 7,900

= $18,300

IF STRAWBERRY IS DROPPED, FIXED COST WILL DECREASE BY 15%

Decrease in fixed cost = 18,300 x 15%

= $2,745

Hence, if strawberry is dropped, fixed costs will be = 18,300 - 2,745

= $15,555

	status	alternative: drop strawberry	difference	increase or decrease
revenue	127,100	83,600	43,500	Decrease
less: variable costs	102,760	63,610	39,150	Decrease
contribution margin	24,340	19,990	4,350	Decrease
less: fixed costs	18,300	15,555	2,745	Decrease
operating profit	$6,040	$4,435	1,605	Decrease

b.

Cotrone should not drop the Strawberry product line. If Strawberry product line is dropped, operating profit would decrease.

May I know the reason for thumbs down? Please tell so that I can rework on it and provide you the amended solution. Thanks.