Question

Keep-or-Drop Decision Petoskey Company produces three products: Alanson, Boyne, and Conway. A segmented income statement, with amounts given in thousands, follows:
Alanson Boyne Conway Total
Sales revenue $1,280 $185 $300 $1,765
Less:
Variable expenses 1,115 45 225 1,385
Contribution margin $ 165 $140 $ 75 $ 380
Less direct fixed expenses:
Depreciation 50 15 10 75
Salaries 95 85 80 260
Segment margin $ 20 $ 40 $ (15) $ 45

Direct fixed expenses consist of depreciation and plant supervisory salaries. All depreciation on the equipment is dedicated to the product lines. None of the equipment can be sold. Assume that, each of the three products has a different supervisor whose position would be eliminated if the associated product were dropped. Assume that 20% of the Alanson customers choose to buy from Petoskey because it offers a full range of products, including Conway. If Conway were no longer available from Petoskey, these customers would go elsewhere to purchase Alanson.

Conceptual Connection: Estimate the impact on profit that would result from dropping Conway.

Answer 1

Answer:

Profit will reduce by $28,000

Explanation:

The impact on profit that would result from dropping Conway is shown below:-

                            Alanson            Boyne       Conway    Total

Sales revenue      $1,024,000     $185,000       -      $1,209,000

                               ($1,280,000 × 80%)

Less

Variable expenses  $892,000      $45,000         -      $937,000

                                 ($1,115,000 × 80%)

Contribution margin$132,000   $140,000 $ -    $272,000

Less:

Direct fixed expenses

Depreciation          $50,000        $15,000        $10,000  $75,000

Salaries                $95,000        $85,000            $ -       $180,000

Segment margin   ($13,000)     $40,000    ($10,000)  $17,000

Existing Profit                                                                    $45,000

Profit will reduce by                                                        $28,000