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 $ 32,600 $ 42,800 $ 51,200 Variable costs 22,000 38,600 40,100 Contribution margin $ 10,600 $ 4,200 $ 11,100 Fixed costs allocated to each product line 4,700 6,000 7,100 Operating profit (loss) $ 5,900 $ (1,800 ) $ 4,000 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?
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 | $ | 32,600 | $ | 42,800 | $ | 51,200 | |||||
| Variable costs | 22,000 | 38,600 | 40,100 | ||||||||
| Contribution margin | $ | 10,600 | $ | 4,200 | $ | 11,100 | |||||
| Fixed costs allocated to each product line | 4,700 | 6,000 | 7,100 | ||||||||
| Operating |
$ | 5,900 | $ | (1,800 | ) | $ | 4,000 | ||||
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?
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