Keep-or-Drop Decision Petoskey Company produces three products: Alanson, Boyne,
ID: 2471489 • Letter: K
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 $270 $1,735 Less: Variable expenses 1,115 45 203 1,363 Contribution margin $165 $140 $67 $372 Less direct fixed expenses: Depreciation 50 15 10 75 Salaries 95 85 108 288 Segment margin $20 $40 $(51) $9 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". Increase $
Explanation / Answer
Calculation of the impact on profit that would result from dropping Conway.:
Less: Loss of sales revenue
$ (1,735,000)
Add: Saving in variable expenses
$ 1,363,000
Add: Saving in Salaries
$ 288,000
Impact on profit that would result from dropping Conway =
$ (84,000)
= Decrease in net income by $84,000
Calculation of the impact on profit that would result from dropping Conway.:
Less: Loss of sales revenue
$ (1,735,000)
Add: Saving in variable expenses
$ 1,363,000
Add: Saving in Salaries
$ 288,000
Impact on profit that would result from dropping Conway =
$ (84,000)
= Decrease in net income by $84,000
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