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

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 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 Margin

Winter 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.

Keep

Drop

Differential

Amount

Contribution margin

Less: Garage/warehouse rent

Supervision

Total relevant benefit (loss)

The company is better off by $fill in the blank 15if itkeepsthe Boat Maintenance line.