Question

1. 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		$435		$1,900
   Less: Variable expenses		1,115		45		348		1,508
   Contribution margin		$165		$140		$87		$392
   Less direct fixed expenses:
   	Depreciation	50		15		14		79
   	Salaries	95		85		108		288
   Segment margin		$20		$40		$(35)		$25

   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 or decrease by $

   Should Petoskey keep or drop Conway?
   

Answer 1

Segmented Income Statement on dropping conway:
	Alanson	Boyne	Total
Sales rev.	1280	185	1465
Less:Variable exp.	1115	45	1160
contribution	165	140	305
Less:Direct fixed exp.:
Dep.	50	15	65
Salaries	95	85	180
Segment margin	20	40	60
gross profit will increase to $60 from $25
So, Petoskey should drop Conway as direct expenses
of Conway is $122 against contribution $87.