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Keep-or-Drop Decision Petoskey Company produces three products: Alanson, Boyne, and Conway. A segmented income statement, with amounts given in thousands, follows: Sales revenue Less: Variable expenses Contribution margin Less direct fixed expenses: Depreciation Salaries Alanson Boyne Conway $1,280 $185 1,115 $165 50 95 $20 45 $140 15 85 $40 $270 203 $67 14 72 $(19) Total $1,735 1,363 $372 79 252 $41 Segment margin 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 Petoskev, these customers would go elsewhere to purchase Alanson.

Keep-or-Drop Decision Petoskey Company produces three products: Alanson, Boyne, and Conway. A segmented income statement, with amounts given in thousands, follows: Sales revenue Less: Variable expenses Contribution margin Less direct fixed expenses: Depreciation Salaries Alanson Boyne Conway $1,280 $185 1,115 $165 50 95 $20 45 $140 15 85 $40 $270 203 $67 14 72 $(19) Total $1,735 1,363 $372 79 252 $41 Segment margin 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 Petoskev, these customers would go elsewhere to purchase Alanson.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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How do I calculate the profit that would result form dropping Conway

**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 | $270 | $1,735 | | Less: Variable expenses | 1,115 | 45 | 203 | 1,363 | | Contribution margin | $165 | $140 | $67 | $372 | | Less direct fixed expenses: | | | | | | Depreciation | 50 | 15 | 14 | 79 | | Salaries | 95 | 85 | 72 | 252 | | Segment margin | $20 | $40 | $(19) | $41 | 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.
Transcribed Image Text:**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 | $270 | $1,735 | | Less: Variable expenses | 1,115 | 45 | 203 | 1,363 | | Contribution margin | $165 | $140 | $67 | $372 | | Less direct fixed expenses: | | | | | | Depreciation | 50 | 15 | 14 | 79 | | Salaries | 95 | 85 | 72 | 252 | | Segment margin | $20 | $40 | $(19) | $41 | 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.
### Text Transcription for Educational Website #### Fixed Expenses and Product Line Decisions Direct fixed expenses consist of depreciation and plant supervisory salaries. All depreciation on the equipment is dedicated to the product lines, and none of the equipment can be sold. - **Product Supervision**: Assume that each of the three products has a different supervisor whose position would be eliminated if the associated product were dropped. - **Customer Preference**: 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 Analysis **Conceptual Connection**: Estimate the impact on profit that would result from dropping Conway. Enter amount in full, rather than in thousands. For example, enter "15000" rather than "15". - **Dropdown Options** - **Decrease**: Selected, indicating a decrease in profit - **52,600**: Estimated decrease in profit (incorrect selection indicated by a red "X") - **Decision**: Should Petoskey keep or drop Conway? The option selected is "Keep" (validated by a green check mark). #### Feedback - **Check My Work** - Instruction: Look at the contribution margin and adjust for dropping product line. Consider the sunk cost and that it is not relevant. This exercise involves evaluating the financial impact of dropping a product line, emphasizing the need for understanding contribution margins and sunk costs in decision-making.
Transcribed Image Text:### Text Transcription for Educational Website #### Fixed Expenses and Product Line Decisions Direct fixed expenses consist of depreciation and plant supervisory salaries. All depreciation on the equipment is dedicated to the product lines, and none of the equipment can be sold. - **Product Supervision**: Assume that each of the three products has a different supervisor whose position would be eliminated if the associated product were dropped. - **Customer Preference**: 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 Analysis **Conceptual Connection**: Estimate the impact on profit that would result from dropping Conway. Enter amount in full, rather than in thousands. For example, enter "15000" rather than "15". - **Dropdown Options** - **Decrease**: Selected, indicating a decrease in profit - **52,600**: Estimated decrease in profit (incorrect selection indicated by a red "X") - **Decision**: Should Petoskey keep or drop Conway? The option selected is "Keep" (validated by a green check mark). #### Feedback - **Check My Work** - Instruction: Look at the contribution margin and adjust for dropping product line. Consider the sunk cost and that it is not relevant. This exercise involves evaluating the financial impact of dropping a product line, emphasizing the need for understanding contribution margins and sunk costs in decision-making.
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