Keep-or-Drop Decisions

A keep-or-drop decision uses relevant cost analysis to determine whether a segment or line of business should be kept or dropped. In a traditional cost management system, segmented income statements, using unit-based fixed or variable costs, improve the ability to make keep-or-drop decisions.

Example: Ginger Company makes three types of microwave ovens. Basic is the small 0.7 cubic foot model sold at discount stores. Countertop is a larger (1.2 cubic foot) model with more advanced features. Built-in is a model designed to fit into cabinetry and is sold through appliance stores. A segmented income statement is shown below.

Sales	$203,305	$864,700	$734,935	$1,802,940
Variable COGS	184,975	302,845	351,875	839,695
Commissions	4,815	42,290	36,600	83,705
Contribution margin	$13,515	$519,565	$346,460	$879,540
Separable fixed expense	29,560	75,345	174,255	279,160
Segment margin	$(16,045)	$444,220	$172,205	$600,380
Common fixed expenses:
Factory overhead				216,165
Selling and administrative expense				289,450
Operating income				$94,765

Ginger Company believes the basic model is a concern and is considering a number of options to deal with this situation. One possibility is to drop the Basic line. If that is done, operating income will be $ ANSWER ,( HIGHER OR LOWER)

.

After further study, Ginger Company has found that if the Basic Model is dropped, sales of the Countertop model will decrease by 5 percent as some stores prefer to order only from a company with both basic and countertop models. Now if the Basic line is dropped, operating income will be $ ANSWER (round to the nearest dollar)

(HIGHER OR LOWER)than if the Basic line is kept.