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.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
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 |
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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