Question 1 Keep-or-Drop Decision Petoskey Company produces three products: Alans

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Question 1

Keep-or-Drop Decision

Petoskey Company produces three products: Alanson, Boyne, and Conway. A segmented income statement, with amounts given in thousands, follows:

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.

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".
$

Question 2

Structuring the Sell-or-Process-Further Decision

Jack's Lumber Yard receives 8,000 large trees each period that it subsequently processes into rough logs by stripping off the tree bark and leaves. Jack’s then must decide whether to sell its rough logs (for use in log cabin construction) at split-off or to process them further into refined lumber (for use in regular construction framing). Jack's normally sells logs for a per-unit price of $490. Alternately, each log can be processed further into 800 feet of lumber at an additional cost of $0.05 per board foot. Also, lumber can be sold for $0.75 per board foot. (Note: One tree is equal to one rough log.)

Required:

1. What is the total contribution to income from selling the logs for log cabin construction?
$

2. What is the total contribution to income from processing the logs into lumber?
$

3. Should Jack's continue to sell the logs or process them further into lumber?

Question 3

Sell at Split-Off or Process Further

Bozo Inc. manufactures two products from a joint production process. The joint process costs $110,000 and yields 6,000 pounds of LTE compound and 14,000 pounds of HS compound. LTE can be sold at split-off for $55 per pound. HS can be sold at split-off for $12 per pound. A buyer of HS asked Bozo to process HS further into CS compound. If HS were processed further, it would cost $49,300 to turn 14,000 pounds of HS into 4,000 pounds of CS. The CS would sell for $45 per pound.

Required:

1. What is the contribution to income from selling the 14,000 pounds of HS at split-off?
$

2. Conceptual Connection: What is the contribution to income from processing the 14,000 pounds of HS into 4,000 pounds of CS?
$

Should Bozo continue to sell the HS at split-off or process it further into CS?

Alanson Boyne Conway Total Sales revenue $1,280 $185 $330 $1,795 Less: Variable expenses 1,115 45 264 1,424 Contribution margin $165 $140 $66 $371 Less direct fixed expenses: Depreciation 50 15 12 77 Salaries 95 85 108 288 Segment margin $20 $40 $(54) $6

Explanation / Answer

1. Total Profit = ($20 + $40 - $54 + $6) = $12

Add: Savings in loss when Conway is dropped = $54

Less : Depreciation of segment Conway = $12

Total Profit if Conway is dropped = $54

The overall profit would be $54000.

Thus the overall profit would increase by $42000 ($54000 - $12000).

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