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	$	33,200		$	42,800		$	51,300
Variable costs		23,240			38,520			41,040
Contribution margin	$	9,960		$	4,280		$	10,260
Fixed costs allocated to each product line		4,700			5,500			7,500
Operating profit (loss)	$	5,260		$	(1,220	)	$	2,760

Required:

a. Prepare a differential cost schedule.

	Status Quo Alternative: Drop Strawberry Difference (all lower under the alternative) Revenue Less: Variable costs Contribution margin Less: Fixed costs Operating profit (loss)

b. Should Cotrone drop the Strawberry product line?

	Yes
	No

Answer 1

Working

Fixed costs
Original	$     4,700.00
Strawberry	$     5,500.00
Orange	$     7,500.00
Total Fixed cost	$   17,700.00
15% of Total fixed cost	$     2,655.00
Fixed cost after dropping Strawberry	$   15,045.00

Differential Cost schedule

	Status Quo	Alternative: Drop Strawberry	Difference (all lower under the alternative)
Revenue	$127,300.00	$ 84,500.00	$42,800.00
Less: Variable costs	$102,800.00	$ 64,280.00	$38,520.00
Contribution margin	$ 24,500.00	$ 20,220.00	$ 4,280.00
Less: Fixed costs	$ 17,700.00	$ 15,045.00	$ 2,655.00
Operating profit (loss)	$   6,800.00	$    5,175.00	$ 1,625.00

Part b

Should Cotrone drop the Strawberry product line?

Answer = No

Explanation

This is happening because even though strawberry is having losses but still giving contribution of $ 4280. When strawberry is dropped Fixed cost of strawberry is transferred to other products. The change in fixed cost is not as much as contribution provided by strawberry segment so strawberry must stay and should not be ddropped.