Cotrone Beverages makes energy drinks in three flavors: Original, Strawberry, an
ID: 2583431 • 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.
Alternative:
Drop
Strawberry
Difference (all lower under
the alternative)
b. Should Cotrone drop the Strawberry product line?
Product Original Strawberry Orange Sales $ 33,300 $ 42,400 $ 50,900 Variable costs 23,310 38,160 40,720 Contribution margin $ 9,990 $ 4,240 $ 10,180 Fixed costs allocated to each product line 4,600 6,400 7,800 Operating profit (loss) $ 5,390 $ (2,160 ) $ 2,380Explanation / Answer
a.
a.
Differential Cost Schedule Status If Strawberry Differential operating profit Quo Is Dropped Increase (Decrease) Sales $ 126,600.00 $ 84,200.00 $ (42,400.00) Less: Variable costs $ 102,190.00 $ 64,030.00 $ (38,160.00) Contribution margin $ 24,410.00 $ 20,170.00 $ (4,240.00) Less: Fixed costs $ 18,800.00 $ 12,400.00 $ (6,400.00) Operating profit $ 5,610.00 $ 7,770.00 $ 2,160.00 b. Yes C Beverages should drop the Strawberry product line as it would result in a increase in the total operating profit.