Charlevoix Company produces three products: Torch, Elk, and Walloon. A segmented income statement follows:

Direct fixed expenses consist of depreciation and advertising. 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 marketing campaign whose advertising would remain if the associated product were dropped.

Required:
1. Estimate the impact on profit that would result from dropping Walloon.
2. Explain why Charlevoix should keep or drop Walloon.

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Sales revenue Less: Variable expenses Contribution margin Less direct fixed expenses: Depreciation Advertising Segment margin Torch Elk Walloon Total $350,000,000 $50,000,000 $80,000,000 $480,000,000 300,000,000 10,000,000 60,000,000 370,000,000 $ 50,000,000 $40,000,000 $20,000,000 $110,000,000 12,000,000 7,000,000 5,000,000 24,000,000 21,000,000 10,000,000 30,000,000 61,000,000 $ 17,000,000 $23,000,000 $(15,000,000) $25,000,000