Answer:
1. We have:
Contribution margin for the Boat Fuel & Concessions line = $700,000
Contribution margin for the Winter Storage line = $1,200,000
2. Keeping Boat Maintenance service line by $630,000.
Explanation:
Note that after dropping Boat Maintenance service line, its Sales revenue and Variable expenses will be eliminated while all the fixed costs will be retained. This is because, generally in Management Accounting, the fact that a a fixed cost is a direct cost does NOT mean that it is avoidable.
Note: See part a of the attached excel for the Segmented Income Statement Before Dropping Boat Maintenance service line, and see part b of the attached excel for the Segmented Income Statement After Dropping Boat Maintenance service line.
1. If the Boat Maintenance service line is dropped, what is the contribution margin for the Boat Fuel & Concessions line? For the Winter Storage line?
In the part b of the attached excel, we have:
Contribution margin for the Boat Fuel & Concessions line = $700,000
Contribution margin for the Winter Storage line = $1,200,000
2. Which alternative (keep or drop the Boat Maintenance line) is now more cost effective and by how much?
From the part a of the attached excel file, we have:
Operating income before dropping Boat Maintenance service line = $815,000
Operating income after dropping Boat Maintenance service line = -$185,000
Cost saving = $815,000 - $185,000 = $630,000
Therefore, keeping Boat Maintenance service line by $630,000.
