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
$27,000
$25,000
Less fi xed costs:
Rent
4,000
–0–
Salaries
5,000
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
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