Dropping Product Lines
Atlantic Soup Company is presently operating at 75 percent of capacity. Worried about the company’s performance, the president is considering dropping its clam chowder line. If clam chowder 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.
|
Product |
Tomato |
Clam Chowder |
Chicken Noodle |
|
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
Prepare a differential cost schedule like the one in Exhibit 4.8 to indicate whether Atlantic should drop the clam chowder product line.
|
Status Quo: |
Alternative: |
Difference |
|
|
Keep Prints |
Drop Prints |
$10,000 decrease |
|
|
Sales revenue |
$80,000 |
$70,000 |
8,000 decrease |
|
Cost of sales (all variable) |
53,000 |
45,000 |
$ 2,000 decrease |
|
Contribution margin |
$27,000 |
$25,000 |
|
|
Less fi xed costs: |
|||
|
Rent |
4,000 |
4,000 |
–0– |
|
Salaries |
5,000 |
4,000 |
1,000 decrease |
|
Marketing and administrative |
3,000 |
2,750 |
250 decrease |
|
Operating profi t (loss) |
$15,000 |
$14,250 |
$ 750 decrease |
Exhibit 4.8 Differential Analysis— U Develop