Question

# Structuring a Keep-or-Drop Product-Line Problem with Complementary Effects Shown below is a segmented income statement for...

Structuring a Keep-or-Drop Product-Line Problem with Complementary Effects

Shown below is a segmented income statement for Mullett Marina’s three main boating service lines:

 Winter Storage Boat Fuel & Concessions Boat Maintenance Total Sales revenue \$4,000,000 \$1,000,000 \$5,000,000 \$10,000,000 Less: Variable expenses 2,000,000 200,000 4,900,000 7,100,000 Contribution margin \$2,000,000 \$ 800,000 \$ 100,000 \$2,900,000 Less direct fixed expenses: Garage/warehouse rent 700,000 55,000 350,000 1,105,000 Supervision 50,000 70,000 150,000 270,000 Equipment depreciation 250,000 75,000 100,000 425,000 Segment margin \$1,000,000 \$ 600,000 \$ (500,000) \$1,100,000

Relevant fixed costs associated with this line include 60% of Boat Maintenance’s garage/warehouse rent and 50% of Boat Maintenance’s supervision salaries. In addition, assume that dropping the Boat Maintenance service line would reduce sales of the Winter Storage line by 20% and sales of the Boat Fuel & Concessions line by 10%. All other information remains the same.

Required:

1. If the Boat Maintenance service line is dropped, what is the contribution margin for the Boat Fuel & Concessions line? For the Winter Storage line?

 Contribution Margin Winter storage line \$ Boat fuel & concessions line \$

2. Which alternative (keep or drop the Boat Maintenance line) is now more cost effective and by how much?

Complete the keep or drop analysis to decide between the alternatives.

 Keep Drop Differential Amount Contribution margin \$ \$ \$ Less: Garage/warehouse rent Supervision Total relevant benefit (loss) \$ \$ \$

The company is better off by \$ if it the Boat Maintenance line.

1.

If the Boat Maintenance service line is dropped, sales of the Winter Storage line will reduce by 20% and sales of the Boat Fuel & Concessions line will reduce by 10%. Variable costs for these product lines will also reduce in the same proportion.

Calculate the contribution margin for the Boat Fuel & Concessions line and for the Winter Storage line as follows:

Above figures have been calculated in the following manner:

2.

The keep or drop analysis to decide between the alternatives will be completed as follows:

Above figures have been calculated in the following manner: