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

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

Winter

StorageBoat Fuel &

ConcessionsBoat

MaintenanceTotalSales revenue$4,000,000$1,000,000$5,000,000$10,000,000Less: Variable expenses2,000,000200,0004,900,0007,100,000Contribution margin$2,000,000$ 800,000$ 100,000$2,900,000Less direct fixed expenses:Garage/warehouse rent700,00055,000350,0001,105,000Supervision50,00070,000150,000270,000Equipment depreciation250,00075,000100,000425,000Segment margin$1,000,000$ 600,000$ (500,000)$1,100,000

Relevant fixed costs associated with this line include 60% of Boat Maintenance's garage/warehouse rent and 50% 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 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 MarginWinter storage line$fill in the blank 1

Boat fuel & concessions line$fill in the blank 2

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.

3. Keep
7. Drop
9. Differential
10. Amount
11. Contribution margin$fill in the blank 3
12. $fill in the blank 4
13. $fill in the blank 5
14. Less: Garage/warehouse rentfill in the blank 6
15. fill in the blank 7
16. fill in the blank 8
17. Supervisionfill in the blank 9
18. fill in the blank 10
19. fill in the blank 11
20. Total relevant benefit (loss)$fill in the blank 12
21. $fill in the blank 13
22. $fill in the blank 14

The company is better off by $fill in the blank 15

if itkeeps

the Boat Maintenance line.