Question

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		$420		$1,885
Less: Variable expenses		1,115		45		315		1,475
Contribution margin		$165		$140		$105		$410
Less direct fixed expenses:
	Depreciation	50		15		15		80
	Salaries	95		85		116		296
Segment margin		$20		$40		$(26)		$34

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 or increase by $

Should Petoskey keep or drop Conway?

Answer 1