Structuring a Keep-or-Drop Product-Line Problem with Complementary Effects shown
ID: 2598110 • Letter: S
Question
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 $4,000,000 2,000,000 $2,000,000 Boat Fuel & Concessions $1,000,000 200,000 $800,000 Boat Total Sales revenue Less: Variable expenses Contribution margin Less direct fixed expenses: Maintenance $5,000,000 4,900,000 $ 100,000 $10,000,000 7,100,000 $2,900,000 Garage/warehouse rent 700,000 50,000 250,000 1,000,000 55,000 70,000 75,000 s 600,000 350,000 150,000 100,000 s (500,000) 1,105,000 270,000 425,000 $1,100,000 Supervision Equipment depreciation Segment margin Relevant fixed costs associated with this line include 60% of Boat Maintenance's garage,warehouse rent and 50% of Boat Mainten in addition, assume that dropping the Boat Maintenance service line would reduce sales of the winter storage line by 20% and sale concessions line by 10%. All other information remains the same Required: 1. If the Boat Maintenance service line is dropped, what is the contribution marpin for the Boat Fuel & Concessions line? For theExplanation / Answer
Contribution Margin % age = Contribution/ Sale*100 Perticulers Winter Boat Fuel & Boat Total Storage Concessions Maintenance 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 ( Sales - Variable Exp) Controbution %age 50% 80% 2% 29% If Boat Maintenance line Drop (Contribution margin Before Droping ) Perticulers Winter Boat Fuel & Total Storage Concessions Sales Revenue $4,000,000 $1,000,000 $5,000,000 Less: Variable Expenses $2,000,000 $200,000 $2,200,000 Contribution Margin $2,000,000 $800,000 $2,800,000 ( Sales - Variable Exp) Controbution %age 50% 80% 56% After droping the Boat Maintenace Deduction of 20% sale of Winter storage & 10% of Concessions Perticulers Winter Boat Fuel & Total Storage Concessions Sales Revenue $3,200,000 $900,000 $4,100,000 Less: Variable Expenses $1,600,000 $180,000 $1,780,000 Contribution Margin $1,600,000 $720,000 $2,320,000 ( Sales - Variable Exp) Controbution %age 50% 80% 56.59% Which alternative is now more cost effective & by how much Boat Maintenace Drop or Keep Keep Drop Differential amount Contribution Margin $2,900,000 $2,320,000 $580,000 Contribution Margin %age 29% 56.59% Less: Fixed Direct Exp Garage/warehouse rent $1,105,000 $442,000 ($1105000*40%) Supervision $270,000 $135,000 ($270000*50%) Eqipment Deprication $425,000 $325,000 ($250000+75000) Segment Margin $1,100,000 $1,418,000 ($318,000) The Company is Better off by $318000 if it Drop the Boat Maintenace line