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	$	35,700			$	45,800			$	54,200
Variable costs		23,000				40,600				42,100
Contribution margin	$	12,700			$	5,200			$	12,100
Fixed costs allocated to each product line		6,700				8,000				9,100
Operating profit (loss)	$	6,000			$	2,800			$	3,000

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

Differential Cost Schedule
Status Quo Alternative Difference Revenue 135,700 89,900 -45,800 Less: VC 105,700 65,100 -40,600 Contribution Margin 30,000 24,800 -5,200 Less: Fixed Costs 23,800 17,850 -5,950 Operating Profit(Loss) 6,200 6,950 750
YES, since profit will increase by $750
b-1
Differential Cost Schedule
Status Quo Alternative Difference Revenue 135,700 85,405 -50,295 Less: VC 105,700 61,845 -43,855 Contribution Margin 30,000 23,560 -6,440 Less: Fixed Costs 23,800 17,850 -5,950 Operating Profit(Loss) 6,200 5,710 -490
b-2 No, as profit will reduce by $490