Shown below is a segmented income statement for Mullett Marina’s three main boating service lines:   Winter Storage   Boat Fuel & Concessions   Boat Maintenance   Total Sales revenue $4,000,000   $1,000,000   $5,000,000   $10,000,000 Less: Variable expenses 2,000,000 200,000 4,900,000 7,100,000 Contribution margin $2,000,000 $ 800,000 $ 100,000 $2,900,000 Less direct fixed expenses:            Garage/warehouse rent 700,000 55,000 350,000 1,105,000    Supervision 50,000 70,000 150,000 270,000    Equipment depreciation 250,000 75,000 100,000 425,000 Segment margin $1,000,000 $ 600,000 $ (500,000) $1,100,000 Relevant fixed costs associated with this line include 60% of Boat Maintenance’s garage/warehouse rent and 50% of Boat Maintenance’s supervision salaries. In addition, assume that dropping the Boat Maintenance service line would reduce sales of the Winter Storage line by 20% and sales of the Boat Fuel & Concessions line by 10%. All other information remains the same. Required: 1.  If the Boat Maintenance service line is dropped, what is the contribution margin for the Boat Fuel & Concessions line? For the Winter Storage line? 2. Which alternative (keep or drop the Boat Maintenance line) is now more cost effective and by how much? Complete the keep or drop analysis to decide between the alternatives.   The company is better off by $fill in the blank if it keeps  the Boat Maintenance line.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Shown below is a segmented income statement for Mullett Marina’s three main boating service lines:

  Winter
Storage
  Boat Fuel &
Concessions
  Boat
Maintenance
  Total
Sales revenue $4,000,000   $1,000,000   $5,000,000   $10,000,000
Less: Variable expenses 2,000,000 200,000 4,900,000 7,100,000
Contribution margin $2,000,000 $ 800,000 $ 100,000 $2,900,000
Less direct fixed expenses:        
   Garage/warehouse rent 700,000 55,000 350,000 1,105,000
   Supervision 50,000 70,000 150,000 270,000
   Equipment depreciation 250,000 75,000 100,000 425,000
Segment margin $1,000,000 $ 600,000 $ (500,000) $1,100,000

Relevant fixed costs associated with this line include 60% of Boat Maintenance’s garage/warehouse rent and 50% of Boat Maintenance’s supervision salaries. In addition, assume that dropping the Boat Maintenance service line would reduce sales of the Winter Storage line by 20% and sales of the Boat Fuel & Concessions line by 10%. All other information remains the same.

Required:

1.  If the Boat Maintenance service line is dropped, what is the contribution margin for the Boat Fuel & Concessions line? For the Winter Storage line?

2. Which alternative (keep or drop the Boat Maintenance line) is now more cost effective and by how much?

Complete the keep or drop analysis to decide between the alternatives.

 

The company is better off by $fill in the blank if it keeps  the Boat Maintenance line.

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