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		$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

Answer 1

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