Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 43

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.

Segmented income statements appear as follows:

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.

Step 1 of 7

Fixed costs:

Fixed cost is the cost that does not change with the change with the number of goods or services produced or sold. They remain constant irrespective of the change.

Example: Depreciation, Insurance, Rent etc.