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		$	42,700		$	51,200
Variable costs		22,960			38,430			40,960
Contribution margin	$	9,840		$	4,270		$	10,240
Fixed costs allocated to each product line		4,500			6,000			7,300
Operating profit (loss)	$	5,340		$	(1,730	)	$	2,940

Required:

a. Prepare a differential cost schedule.

b. Should Cotrone drop the Strawberry product line?

	Yes
	No

Answer 1

a) Differential cost schedule
	Status Quo	Alternative drop Strawberry	Difference (all over under the alternative
Revenue	$                       1,26,700	$                 84,000	$                      -42,700
	(32800+42700+51200)	(32800+51200)	(84000-126700)
Less: Variable cost	$                       1,02,350	$                 63,920	$                      -38,430
	(22960+38430+40960)	(22960+40960)	(63920-102350)
Contribution margin	$                           24,350	$                 20,080	$                        -4,270
	(126700-102350)	(84000-63920)	(-42700--38430)
Less :Fixed cost	$                           17,800	$                 15,130	$                        -2,670
	(4500+6000+7300)	(17800*85%)
Operating profit/Loss	$                             6,550	$                   4,950	$                        -1,600
b) No - Cotrone Beverages should not drop the Strawberry product line it reduce overall operating income by $ 1,600