Structuring a Keep-or-Drop Product-Line Problem

Shown below is a segmented income statement for Mullett Marinas three main boating service lines:

	Winter Storage		Boat Fuel & Concessions		Boat Maintenance		Total
Sales revenue	$4,000,000		$1,000,000		$5,000,000		$10,000,000
Less: Variable expenses	2,000,000		200,000		4,900,000		7,100,000
Contribution margin	$2,000,000		$ 800,000		$ 100,000		$2,900,000
Less direct fixed expenses:
Garage/warehouse rent	700,000		55,000		350,000		1,105,000
Supervision	50,000		70,000		150,000		270,000
Equipment depreciation	250,000		75,000		100,000		425,000
Segment margin	$1,000,000		$ 600,000		$ (500,000)		$1,100,000

Mulletts management is deciding whether to keep or drop the Boat Maintenance service line. Mulletts Boat Maintenance service line has a contribution margin of $100,000 (sales of $5,000,000 less total variable costs of $4,900,000). All variable costs are relevant. Relevant fixed costs associated with this line include 60% of Boat Maintenances garage/warehouse rent and 50% of Boat Maintenances supervision salaries.

List the relevant benefits and costs for each alternative. Note: Enter all amounts as positive numbers except loss, if applicable.

	Boat Maintenance		Differential
	Keep	Drop	Amount
Sales
Less: Variable expenses
Contribution margin
Less: Garage/warehouse rent*
Supervision
Total relevant benefit (loss)