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Keep-or-Drop Decision Petoskey Company produces three products: Alanson, Boyne, and Conway. A segmented income statement, with...

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 $375 $1,840
Less: Variable expenses 1,115 45 300 1,460
Contribution margin $165 $140 $75 $380
Less direct fixed expenses:
Depreciation 50 15 15 80
Salaries 95 85 80 260
Segment margin $20 $40 $(20) $40

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  $___________

Should Petoskey keep or drop Conway?
Drop

Solutions

Expert Solution

Statement of income assuming Conway is dropped

Alanson

Boyle

Conway

Total

Sales revenue

$ 1,280.00

$    185.00

$    1,465.00

Less: Variable expenses

$ 1,115.00

$      45.00

$    1,160.00

Contribution margin

$     165.00

$    140.00

$                 -  

$        305.00

Less direct fixed expenses:

            Depreciation

$        50.00

$      15.00

$          15.00

$          80.00

            Salaries

$        95.00

$      85.00

$        180.00

Segment margin

$        20.00

$      40.00

$        (15.00)

$          45.00

Impact on profit that would result from dropping Conway will be

Increase  $ 5000

Should Petoskey keep or drop Conway?-- Yes


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