Cotrone Beverages makes energy drinks in three flavors: Original, Strawberry, an
ID: 2336116 • Letter: C
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:
Required:
a. Prepare a differential cost schedule.
b. Should Cotrone drop the Strawberry product line?
Product Original Strawberry Orange Sales $ 33,200 $ 42,800 $ 51,300 Variable costs 23,240 38,520 41,040 Contribution margin $ 9,960 $ 4,280 $ 10,260 Fixed costs allocated to each product line 4,700 5,500 7,500 Operating profit (loss) $ 5,260 $ (1,220 ) $ 2,760Explanation / Answer
Working
Fixed costs
Original
$ 4,700.00
Strawberry
$ 5,500.00
Orange
$ 7,500.00
Total Fixed cost
$ 17,700.00
15% of Total fixed cost
$ 2,655.00
Fixed cost after dropping Strawberry
$ 15,045.00
Differential Cost schedule
Status Quo
Alternative: Drop Strawberry
Difference (all lower under the alternative)
Revenue
$127,300.00
$ 84,500.00
$42,800.00
Less: Variable costs
$102,800.00
$ 64,280.00
$38,520.00
Contribution margin
$ 24,500.00
$ 20,220.00
$ 4,280.00
Less: Fixed costs
$ 17,700.00
$ 15,045.00
$ 2,655.00
Operating profit (loss)
$ 6,800.00
$ 5,175.00
$ 1,625.00
Part b
Should Cotrone drop the Strawberry product line?
Answer = No
Explanation
This is happening because even though strawberry is having losses but still giving contribution of $ 4280. When strawberry is dropped Fixed cost of strawberry is transferred to other products. The change in fixed cost is not as much as contribution provided by strawberry segment so strawberry must stay and should not be ddropped.
Fixed costs
Original
$ 4,700.00
Strawberry
$ 5,500.00
Orange
$ 7,500.00
Total Fixed cost
$ 17,700.00
15% of Total fixed cost
$ 2,655.00
Fixed cost after dropping Strawberry
$ 15,045.00