Cotrone Beverages makes energy drinks in three flavors: Original, Strawberry, an
ID: 2534952 • 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: Product Original Strawberry Orange Sales $ 32,800 $ 42,200 $ 51,100 Variable costs 22,960 37,980 40,880 Contribution margin $ 9,840 $ 4,220 $ 10,220 Fixed costs allocated to each product line 5,000 6,100 7,200 Operating profit (loss) $ 4,840 $ (1,880 ) $ 3,020 Required: a. Prepare a differential cost schedule. b. Should Cotrone drop the Strawberry product line? Yes No
Explanation / Answer
a.
b. No.
The Strawberry product-line should not be dropped as it will result in a decrease in operating profit of $1475 since the contribution margin lost $4220 is greater than the reduction in fixed costs $2745.
Cotrone Beverages Differential Cost Schedule CurrentTotal Alternative: Strawberry Is Dropped Difference (all lower under the Alternative) Revenues 126100 83900 42200 Variable costs -101820 -63840 -37980 Contribution margin 24280 20060 4220 Fixed costs -18300 -15555 -2745 Operating profit (loss) 5980 4505 1475