Question

eep-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 remain if the associated product were dropped. Required: CONCEPTUAL CONNECTION: Estimate the impact on profit that would result from dropping Conway. Enter amount in full, rather than in thousands. For example, "15000" rather than "15". Decrease $ 42,000 Should Petoskey keep or drop Conway

Answer 1

Answer:

                        PETOSKEY COMPANY

                             INCOME STATEMENT  - Keeping Conway

                                Alanson          Boyne       Conway             Total

Sales                      $1,280,000    $185,000     $300,000        $1,765,000

Variable expenses  ( 1,115,000)      (45,000)      (225,000)     (1,385,000)

Contribution                165,000       140,000         75,000           380,000

direct fixed cost

Depreciation                  (50,000)     (15,000)        (10,000)          (75,000)

Salaries                         (95,000)     (85,000)       (80,000)       (260,000)

Segment Margin            20,000        40,000        (15,000)         45,000

  INCOME STATEMENT  - Dropping Conway

                                Alanson          Boyne                    Total

Sales                      $1,280,000    $185,000            $1,465,000

Variable expenses  ( 1,115,000)     (45,000)           (1,160,000)

Contribution               165,000     140,000            305,000

Depreciation                                                              (75,000)

Salaries                                                                     (260,000)

net income                                                                ( 30,000)

Decision: Product Conway should not be dropped because it has positive contribution and since depreciation charge and supervisor salaries remians. Dropping of Conway will lead to negative profit for the whole company

Explanation: