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 $300 $1,765 Less: Variable expenses 1,115 45 225 1,385 Contribution margin $ 165 $140 $ 75 $ 380 Less direct fixed expenses: Depreciation 50 15 10 75 Salaries 95 85 80 260 Segment margin $ 20 $ 40 $ (15) $ 45 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". Decrease $

Solution:

A decision to retain or drop is a business choice to determine whether to hold or reduce the drug. All related costs shall be weighed for decision-making.

The effect on the benefit from the decrease in the Conway price is estimated as follows:

Particular                           Alanson         Boyne          Conway        Total

Sales revenue                  1,280,000     185,000                         1,465,000

Less: variable expenses   (1,115,000)    (45,000)                         (1,160,000)

Contribution margin           165,000      140,000                          305,000

Less: direct fixed expenses

Depreciation                      50,000          15,000       13,000         78,000

Salaries                              95,000           85,000       120,000      300,000

Segment margin                20,000           40,000      (133,000)     (73,000)

Existing margin                                                                                 35,000

Profit will reduce by                                                                         108,000