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		$435		$1,900
Less: Variable expenses		1,115		45		326		1,486
Contribution margin		$165		$140		$109		$414
Less direct fixed expenses:
	Depreciation	50		15		15		80
	Salaries	95		85		120		300
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 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 by ______

Should Petoskey keep or drop Conway?

Answer 1

Answer:

If Conway is dropped out, Supervisory salaries of $112000 would be saved.But even if conway is dropped out, Depreciation on equipment $11000 can not be avoided since no equipment can be sold. Depreciation of $11000 would incurres even if conway drops out.

Segmented Income Statement( If conway drops out)

	Alanson	Boyne	Total
Sales Revenue	1280000	185000	1465000
Less Variable Expenses	1115000	45000	1160000
Contribution Margin	165000	140000	305000
Less: Direct Fixed Expenses
Depreciation			76000
Salaries(292000 - 112000)			180000
Segment Margin			49000

Hence, If Conway is dropped out, Total Profit of the Company would increases from $46000 to $49000

THANK YOU!!