Solution:
A decision to retain or drop is a business choice to determine whether to hold or reduce the drug. All related costs shall be weighed for decision-making.
The effect on the benefit from the decrease in the Conway price is estimated as follows:
Particular Alanson Boyne Conway Total
Sales revenue 1,280,000 185,000 1,465,000
Less: variable expenses (1,115,000) (45,000) (1,160,000)
Contribution margin 165,000 140,000 305,000
Less: direct fixed expenses
Depreciation 50,000 15,000 13,000 78,000
Salaries 95,000 85,000 120,000 300,000
Segment margin 20,000 40,000 (133,000) (73,000)
Existing margin 35,000
Profit will reduce by 108,000