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

84

264

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 wouldbe eliminatedif 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.

Required:

Conceptual Connection: Estimate the impact on profit that would result from dropping Conway. Enter amount in full, rather than in thousands. For example, "15000" rather than "15".

$fill in the blank 2

Should Petoskey keep or drop Conway?