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 45 225 1,385 Contribution margin $ 165 $140 $ 75 $ 380 Less direct fixed expenses:

Depreciation (50) (15) (10) (75)

Salaries (95) (85) (80) (260)

Segment margin $ 20 $ 40 $ (15) $ 45 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. Also, each of the three products has a different supervisor whose position would remain if the associated product were dropped.

Required:

Estimate the impact on profit that would result from dropping Conway. Explain why Petoskey should keep or drop Conway.

Exercise