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

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Accounting

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 45 263 1,423
Contribution margin $165 $140 $112 $417
Less direct fixed expenses:
Depreciation 50 15 10 75
Salaries 95 85 116 296
Segment margin $20 $40 $(14) $46

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.

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