Brief Exercise 8-31 Structuring a Keep-or-Drop Product-Line Problem Refer to the information for Mullett Marina. Mullett’s management is deciding whether to keep or drop the Boat Maintenance service line. Mullett’s Boat Maintenance service line has a contribution margin of $400,000 (sales of $6,000,000 less total variable costs of $5,600,000). All variable costs are relevant. Relevant fixed costs associated with this line include 70% of Boat Maintenance’s garage/warehouse rent and 40% of Boat Maintenance’s supervision salaries.

Presented below is a segmented income statement for Mullett Marina’s three main boating service lines:

Required:
1. List the alternatives being considered with respect to the Boat Maintenance service line.
2. List the relevant benefits and costs for each alternative.
3. Which alternative is more cost effective and by how much?

Sales revenue Less: Variable expenses Contribution margin Winter Storage $4,000,000 Boat Fuel & Concessions $1,000,000 Boat Maintenance Total $6,000,000 $11,000,000 2,000,000 200,000 5,600,000 7,800,000 $2,000,000 $ 800,000 $ 400,000 $ 3,200,000 Less direct fixed expenses: Garage/warehouse rent Supervision Equipment depreciation Segment margin 700,000 55,000 400,000 1,155,000 50,000 70,000 550,000 670,000 250,000 75,000 100,000 425,000 $1,000,000 $ 600,000 $ (650,000) $ 950,000