Exercise 4-49 (Algo) Dropping Product Lines (LO 4-4)

1. Cotrone Beverages makes energy drinks in three flavors: Original, Strawberry, and Orange. The 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	$	32,300			$	43,000			$	51,200
Variable costs		22,610				38,700				40,960
Contribution margin	$	9,690			$	4,300			$	10,240
Fixed costs allocated to each product line		4,600				6,200				7,400
Operating profit (loss)	$	5,090			$	(1,900	)		$	2,840

Required:

a. Prepare a differential cost schedule. (Select option "increase" or "decrease", keeping Status Quo as the base. Select "none" if there is no effect.)

2. Exercise 4-37 (Algo) Special Orders (LO 4-1, 2)

Alpine Luggage has a capacity to produce 400,000 suitcases per year. The company is currently producing and selling 320,000 units per year at a selling price of $405 per case. The cost of producing and selling one case follows:

Variable manufacturing costs	$	155
Fixed manufacturing costs		39
Variable selling and administrative costs		80
Fixed selling and administrative costs		20
Total costs	$	294

The company has received a special order for 30,000 suitcases at a price of $250 per case. It will not have to pay any sales commission on the special order, so the variable selling and administrative costs would be only $51 per suitcase. The special order would have no effect on total fixed costs. The company has rejected the offer based on the following computations:

Selling price per case	$	250
Variable manufacturing costs		155
Fixed manufacturing costs		39
Variable selling and administrative costs		51
Fixed selling and administrative costs		20
Net profit (loss) per case	$	(15	)

Required:

a. What is the impact on profit for the year if Alpine accepts the special order? (Enter your answers in thousands of dollars. Select option "higher" or "lower", keeping Status Quo as the base. Select "none" if there is no effect.)

Required: a. Prepare a differential cost schedule. (Select option "increase" or "decrease", keeping Status Quo as the base. Select "none" if there is no effect.) Status Quo Alternative: Drop Strawberry Difference Revenue decrease Less: Variable costs decrease decrease decrease decrease Contribution margin Operating profit (loss) Less: Fixed costs Required: a. What is the impact on profit for the year if Alpine accepts the special order? (Enter your answers in thousands of dollars. Select option "higher" or "lower", keeping Status Quo as the base. Select "none" if there is no effect.) (All revenues and costs in $000) Status Quo Alternative 350,000 Units Difference 320,000 Units Sales revenue Variable costs: Manufacturing Selling and administrative Contribution margin Fixed costs Operating profit