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.
Homework Answers
Answer #1
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:
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