Keep-or-Drop Decision Petoskey Company produces three products: Alanson, Boyne,

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 $330 $1,795 Less: Variable expenses 1,115 45 248 1,408 Contribution margin $165 $140 $82 $387 Less direct fixed expenses: Depreciation 50 15 10 75 Salaries 95 85 112 292 Segment margin $20 $40 $(40) $20 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".

Explanation / Answer

Impact in profits

If drop convey profit will decrease by 75000.

Note that depreciation is a sunk cost and not relevent to the decision

Keep drop diff. Amount to keep Sales 300000 300000 Less variable cost 225000 225000 Contribution margin 75000 75000 Total relevant benefit(increase) 75000 75000

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