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 Sales revenue Less: Variable expenses Contribution margin Less direct fixed expenses Alanson Boyne Conway Total $40 $1,915 1,520 $395 $1,280 $185 45 $165 $140 1,115 360 $90 50 95 $20 15 85 $40 10 120 $(40) 75 300 $20 Depreciation Salaries Segment margin 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 Assume that 20% of the Alanson customers choose to buy from Petoskey because it offers a full range of products, including Conway. If Conway were no longer available from Petoskey, these customers would go elsewhere to purchase Alanson 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

Explanation / Answer

Loss in contribution margin of Conway -90 Loss in contribution margin of Alanson -33 =-65*20% Avoidable direct fixed costs 120 Change in income -3 Decrease by $3000

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