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Homework answers / question archive / O'Neil Enterprises produces a line of canned soups for sale at supermarkets across the country

O'Neil Enterprises produces a line of canned soups for sale at supermarkets across the country

Accounting

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 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-I. 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 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? 
 

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Part A        
Differential Analysis
  Status Quo Alternative:Drop Beef Barley Difference  
Revenue 138400 91700 46700 Decrease
Less:Variable Costs 107200 66000 41200 Decrease
   Contribution margin 31200 25700 5500 Decrease
Less:Fixed Costs 25600 19200 6400 Decrease
   Operating Profit(loss) 5600 6500 -900 Increase
         
Since the Operating profit has increased by $900 hence       
dropping the Beef Barley is better.        
         
Part B        
Differential Analysis(As per Manager estimnates)
  Status Quo Alternative:Drop Beef Barley Difference  
Revenue 138400 82530 55870 Decrease
Less:Variable Costs 107200 59400 47800 Decrease
   Contribution margin 31200 23130 8070 Decrease
Less:Fixed Costs 25600 19200 6400 Decrease
   Operating Profit(loss) 5600 3930 1670 Decrease
         
Since the Operating profit has decreased by $1670 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%    
         
Part A        
Differential Analysis
  Status Quo Alternative:Drop Beef Barley Difference  
Revenue =36600+46700+55100 =36600+55100 =138400-91700 Decrease
Less:Variable Costs =23300+41200+42700 =23300+42700 =107200-66000 Decrease
   Contribution margin =138400-107200 =91700-66000 =31200-25700 Decrease
Less:Fixed Costs =7300+8600+9700 =25600*(1-25%) =25600-19200 Decrease
   Operating Profit(loss) =31200-25600 =25700-19200 =5600-6500 Increase
         
Since the Operating profit has increased by $900 hence       
dropping the Beef Barley is better.        
         
Part B        
Differential Analysis(As per Manager estimnates)
  Status Quo Alternative:Drop Beef Barley Difference  
Revenue =36600+46700+55100 =(36600+55100)*(1-10%) =138400-82530 Decrease
Less:Variable Costs =23300+41200+42700 =(23300+42700)*(1-10%) =107200-59400 Decrease
   Contribution margin =138400-107200 =82530-59400 =31200-23130 Decrease
Less:Fixed Costs =7300+8600+9700 =25600*(1-25%) =25600-19200 Decrease
   Operating Profit(loss) =31200-25600 =23130-19200 =5600-3930 Decrease
         
Since the Operating profit has decreased by $1670 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%    
         

 

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