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

Part A
Differential Analysis
Particulars	Current Sales	Alternative:Drop Beef Barley	Difference	Effect
Revenue	$                         142,900.00	$                                94,700.00	$            48,200.00	Decrease
	($38,100+$48,200+$56,600)	($38,100+$56,600)
Less:Variable Costs	$                         109,700.00	$                                67,500.00	$            42,200.00	Decrease
Contribution margin	$                           33,200.00	$                                27,200.00	$              6,000.00	Decrease
Less:Fixed Costs	$                           28,600.00	$                                21,450.00	$              7,150.00	Decrease
		($28,600*(1-0.25))
Operating Profit(loss)	$                             4,600.00	$                                  5,750.00	$            (1,150.00)	Increase
Since the Operating profit has increased by $1150 hence dropping the Beef Barley is better.
Part B
Differential Analysis(As per Manager estimnates)
Particulars	Current Sales	Alternative:Drop Beef Barley	Difference	Effect
Revenue	$                         142,900.00	$                                89,965.00	$            52,935.00	Decrease
		($94,700*(1-0.05))
Less:Variable Costs	$                         109,700.00	$                                64,125.00	$            45,575.00	Decrease
		($67,500*(1-0.05))
Contribution margin	$                           33,200.00	$                                25,840.00	$              7,360.00	Decrease
Less:Fixed Costs	$                           28,600.00	$                                21,450.00	$              7,150.00	Decrease
Operating Profit(loss)	$                             4,600.00	$                                  4,390.00	$                 210.00	Decrease
Since the Operating profit has decreased by $210 hence dropping the Beef Barley is not acceptable.
Note:
It has been said that the sales of the Broth soup and Minestone will be lost by 5% that means that the Total Sales units will be reduced by 5%, so if this happens then variable cost will also be reduced by 5%. So considering this both the sales revenue and variable cost has been reduced by 5%.