Brief Exercise 8-32 Structuring a Keep-or-Drop Product-Line Problem with Complementary Effects Refer to the information for Mullett Marina. Relevant fixed costs associated with this line include 70% of Boat Maintenance’s garage/warehouse rent and 40% of Boat Maintenance’s supervision salaries. In addition, assume that dropping the Boat Maintenance service line would reduce sales of the Winter Storage line by 10% and sales of the Boat Fuel & Concessions line by 5%. All other information remains the same.

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

Required:
1. If the Boat Maintenance service line is dropped, what is the contribution margin for the Boat Fuel & Concessions line? For the Winter Storage line?
2. Which alternative (keep or drop the Boat Maintenance line) is now 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