Structuring a Keep-or-Drop Product-Line Problem with Complementary Effects

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

Relevant fixed costs associated with this line include 60% of Boat Maintenances garage/warehouse rent and 50% of Boat Maintenances supervision salaries. In addition, assume that dropping the Boat Maintenance service line would reduce sales of the Winter Storage line by 20% and sales of the Boat Fuel & Concessions line by 10%. All other information remains the same.

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?

Contribution Margin
Winter storage line	$
Boat fuel & concessions line	$

2. Which alternative (keep or drop the Boat Maintenance line) is now more cost effective and by how much?

Complete the keep or drop analysis to decide between the alternatives.

	Keep	Drop	Differential Amount
Contribution margin	$	$	$
Less: Garage/warehouse rent
Supervision
Total relevant benefit (loss)	$	$	$

The company is better off by $ if it the Boat Maintenance line.