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 75 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 Sales Variable costs Contribution margin Fixed costs allocated to each product line Operating profit (loss) Broth $37,880 23,780 $14,100 8,189 $ 6,000 Beef Barley $47,989 42,899 $ 5,980 9,400 $3,500 Minestrone $56,300 43,500 $12,888 10,500 $ 2,300 Required: 0-1. Complete the following differential cost schedule. -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'Nell, some of them might stop buying the other soups as well. She estimates that 10 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
	Status Quo	Alternative:Drop Beef Barley	Difference
Revenue	$                             1,42,000	$                                    94,100	$                                47,900	Decrease
Less:Variable Costs	$                             1,09,200	$                                    67,200	$                                42,000	Decrease
Contribution margin	$                                32,800	$                                    26,900	$                                  5,900	Decrease
Less:Fixed Costs	$                                28,000	$                                    21,000	$                                  7,000	Decrease
Operating Profit(loss)	$                                  4,800	$                                      5,900	$                                 -1,100	Increase
Since the Operating profit has increased by $1100 hence dropping the Beef Barley is better
Part B
Differential Analysis(As per Manager estimnates)
	Status Quo	Alternative:Drop Beef Barley	Difference
Revenue	$                             1,42,000	$                                    84,690	$                                57,310	Decrease
Less:Variable Costs	$                             1,09,200	$                                    60,480	$                                48,720	Decrease
Contribution margin	$                                32,800	$                                    24,210	$                                  8,590	Decrease
Less:Fixed Costs	$                                28,000	$                                    21,000	$                                  7,000	Decrease
Operating Profit(loss)	$                                  4,800	$                                      3,210	$                                  1,590	Decrease
Since the Operating profit has decreased by $1590 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 10% that means that the Total Sales units will be reduced by 10%, so if this happens then variable cost
will also be reduced by 10%. So considering this both the sales revenue and variable cost has been reduced by 10%