Question

EXAMPLE ONE -

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		$300		$1,765
Less: Variable expenses		1,115		45		210		1,370
Contribution margin		$165		$140		$90		$395
Less direct fixed expenses:
	Depreciation	50		15		10		75
	Salaries	95		85		108		288
Segment margin		$20		$40		$(28)		$32

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".

EXAMPLE 2-

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		$405		$1,870
Less: Variable expenses		1,115		45		304		1,464
Contribution margin		$165		$140		$101		$406
Less direct fixed expenses:
	Depreciation	50		15		10		75
	Salaries	95		85		108		288
Segment margin		$20		$40		$(17)		$43

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".

EXAMPLE 3 -

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		$300		$1,765
Less: Variable expenses		1,115		45		210		1,370
Contribution margin		$165		$140		$90		$395
Less direct fixed expenses:
	Depreciation	50		15		15		80
	Salaries	95		85		116		296
Segment margin		$20		$40		$(41)		$19

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".

Answer 1

1. Impact on profit that would result from dropping Conway (Supervisory Cost cannot be eliminated)
Particulars	Alanson	Boyne	Total
Sales Revenue	1280000	185000	1465000
Less: Variable Expense	1115000	45000	1160000
Contribution Margin	165000	140000	305000
Less: Direct Fixed Expenses
Depreciation			75000
Salaries			288000
Net Profit			-58000
Impact on Net Profit = -58000-32000 = -90000.00
It will result in Loss of $ 90,000.00
2. Impact on profit that would result from dropping Conway (Supervisory Cost can be eliminated)
Particulars	Alanson	Boyne	Total
Sales Revenue	1280000	185000	1465000
Less: Variable Expense	1115000	45000	1160000
Contribution Margin	165000	140000	305000
Less: Direct Fixed Expenses
Depreciation			75000
Salaries			180000
Net Profit			50000
Impact on Net Profit = 50000-43000 = 7000.00
It will result in additional Profit of $ 7,000.00
2. Impact on profit that would result from dropping Conway (20% Alanson Also gone)
Particulars	Alanson	Boyne	Total
Sales Revenue	1024000	185000	1209000
Less: Variable Expense	892000	45000	937000
Contribution Margin	132000	140000	272000
Less: Direct Fixed Expenses
Depreciation			80000
Salaries			180000
Net Profit			12000
Impact on Net Profit = 12000-19000 = -7000.00
It will result in Loss of $ 7,000.00