Question

O’Neil Enterprises produces a line of canned soups for sale at supermarkets across the country. Demand has been “soft” recently and the company is operating at 70 percent of capacity. The company is considering dropping one of the soups, beef barley, in hopes of improving profitability. If beef barley is dropped, the revenue associated with it will be lost and the related variable costs saved. The CFO estimates that the fixed costs will also be reduced by 25 percent.

The following product line statements are available.

Product	Broth				Beef Barley				Minestrone
Sales	$	38,100			$	48,200			$	56,600
Variable costs		23,800				42,200				43,700
Contribution margin	$	14,300			$	6,000			$	12,900
Fixed costs allocated to each product line		8,300				9,600				10,700
Operating profit (loss)	$	6,000			$	3,600			$	2,200

Required:

a-1. Complete the following differential cost schedule.

a-2. From an operating profit perspective, should O'Neil drop the beef barley line?

b. When the product manager for the minestrone soup hears that managers are considering dropping the beef barley line, she points out that many O’Neil customers buy more than one soup flavor and if beef barley is not available from O’Neil, some of them might stop buying the other soups as well. She estimates that 5 percent of the current sales of both broth and minestrone will be lost if beef barley is dropped.

b-1. Complete the following differential cost schedule.

b-2. Based on the estimate from the project manager, should O'Neil drop the beef barley line?

Answer 1

The following product line statements are available.

Product	Broth	Beef Barley	Minestrone	Total
Sales	38,100	48,200	56,600	142900
Variable costs	23,800	42,200	43,700	109700
Contribution margin	14,300	6,000	12,900	33200
Fixed costs allocated to each product line	8,300	9,600	10,700	28600
Operating profit (loss)	6,000	(3,600)	2,200	4600

.

a-1. Complete the following differential cost schedule.

Product	Existing status	Proposed drop beef barely	Differential
Sales	142900	94700	48200
Variable costs	109700	67500	42200
Contribution margin	33200	27200	6000
Fixed costs allocated to each product line	28600	21450	7150
Operating profit (loss)	4600	5750	(1150)

**Revised fixed cost = 28600 - 25% = 21450

.

a-2. From an operating profit perspective, should O'Neil drop the beef barley line?

.

Ans: Beef barely line should be dropped since there will be increase overall profit by $1150

.

b. When the product manager for the minestrone soup hears that managers are considering dropping the beef barley line, she points out that many O’Neil customers buy more than one soup flavor and if beef barley is not available from O’Neil, some of them might stop buying the other soups as well. She estimates that 5 percent of the current sales of both broth and minestrone will be lost if beef barley is dropped.

b-1. Complete the following differential cost schedule.

.

Product	Existing status	Proposed drop beef barely	Differential
Sales	142900	89965	52935
Variable costs	109700	64125	45575
Contribution margin	33200	25840	7360
Fixed costs allocated to each product line	28600	21450	7150
Operating profit (loss)	4600	4390	210

working note:-

Product	Broth		Minestrone		Proposed drop beef barely
Sales	38,100	38100-5% =36195	56,600	5660-5% =53770	89965
Variable costs	23,800	23800-5% =22610	43,700	43700-5% =41515	64125
Contribution margin	14,300	36195-22610 =13585	12,900	53770-41515 =12255	25840
Fixed costs allocated to each product line	8,300		10,700		21450
Operating profit (loss)	6,000		2,200		4390

b-2. Based on the estimate from the project manager, should O'Neil drop the beef barley line?

.

Ans: Beef barely line should not be dropped since there will be decrease overall profit by $210