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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
$285
$1,750
Less: Variable expenses
1,115
45
214
1,374
Contribution margin
$165
$140
$71
$376
Less direct fixed expenses: Depreciation
50
15
13
78
Salaries
95
85
76
256
Segment margin
$20
$40
$(18)
$42
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.
Should Petoskey keep or drop Conway?
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