Cotrone Beverages makes energy drinks in three flavors: Original, Strawberry, an

Question

Cotrone Beverages makes energy drinks in three flavors: Original, Strawberry, and Orange. 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: OriginalStrawberry Orange Product Sales Variable costs $32,400 $43,200 $51,200 40,960 4,320 $10,240 6,900 $5,420 (1,580) 3,340 22,680 9,720 4,300 880 Contribution margin Fixed costs allocated to each product line 900 Operating profit (loss) Required a. Prepare a differential cost schedule Difference (all lower under Alternative: Status Quo Drop Strawberry the alternative) 126,800 S 102,520 24,280 17,100 83,600 S 63,640 19,960$ 13,680 43,200 38,880 4,320 Revenue Less: Variable costs Contribution margin Less: Fixed costs Operating profit loss) b. Should Cotrone drop the Strawberry product line? Yes No

Explanation / Answer

a Prepare a differential cost schedule Status Quo Alternative : Drop Strawberry Difference (all lower under the alternative) Revenue $126,800 $83,600 ($43,200) Less : Variable Costs 102520 63640 -38880 Contribution Margin $24,280 $19,960 ($4,320) Less : Fixed Costs 17100 14535 -2565 Operating profit (loss) $7,180 $5,425 ($1,755) Total Fixed costs $17,100 If strawberry flavor is drop, fixed costs would reduce by 15% $14,535 b Should Cotrone Drop the strawberry product line Cotrone should not drop the strawberry product line as this would result in loss of revenue of $ 1755

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