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	$	33,300			$	42,300			$	51,400
Variable costs		23,310				38,070				41,120
Contribution margin	$	9,990			$	4,230			$	10,280
Fixed costs allocated to each product line		5,000				5,800				7,300
Operating profit (loss)	$	4,990			$	(1,570	)		$	2,980

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.)

b. Should Cotrone drop the Strawberry product line?

• Yes

• No

Answer 1