Problem 4-65 (Algo) Decision Whether to Add or Drop (LO 4-4)

ONeil 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 80 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	$	36,600			$	46,700			$	55,100
Variable costs		23,300				41,200				42,700
Contribution margin	$	13,300			$	5,500			$	12,400
Fixed costs allocated to each product line		7,300				8,600				9,700
Operating profit (loss)	$	6,000			$	3,100			$	2,700

Required:

a-1. Complete the following differential cost schedule.

Complete the following differential cost schedule.

	Status Quo	Alternative: Drop Beef Barley	Difference
Revenue
Less: Variable costs
Contribution margin
Less: Fixed costs
Operating profit (loss)

a-2. From an operating profit perspective, should O'Neil drop the beef barley line?

From an operating profit perspective, should O'Neil drop the beef barley line?

	Yes No

b. When the product manager for the minestrone soup hears that managers are considering dropping the beef barley line, she points out that many ONeil customers buy more than one soup flavor and if beef barley is not available from ONeil, 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.

When the product manager for the minestrone soup hears that managers are considering dropping the beef barley line, she points out that many ONeil customers buy more than one soup flavor and if beef barley is not available from ONeil, 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.

B1. Complete the following differential cost schedule.

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

b-2. Based on the estimate from the project manager, should O'Neil drop the beef barley line?

When the product manager for the minestrone soup hears that managers are considering dropping the beef barley line, she points out that many ONeil customers buy more than one soup flavor and if beef barley is not available from ONeil, 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.

B2. Based on the estimate from the project manager, should O'Neil drop the beef barley line?

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	Yes No