Shown below is a segmented income statement for Mullett Marina’s three main boating service lines:
Winter Storage Boat Fuel & Boat Total
Concessions Maintenance
Sales revenue $4,000,000 $1,000,000 $5,000,000 $10,000,000
Less: Variable expenses 2,000,000 200,000 4900,000 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?
2. Which alternative (keep or drop the Boat Maintenance line) is now more cost effective and by how much?

Note that after dropping Boat Maintenance service line, its Sales revenue and Variable expenses will be eliminated while all the fixed costs will be retained. This is because, generally in Management Accounting, the fact that a a fixed cost is a direct cost does NOT mean that it is avoidable.

Note: See part a of the attached excel for the Segmented Income Statement Before Dropping Boat Maintenance service line, and see part b of the attached excel for the Segmented Income Statement After Dropping Boat Maintenance service line.

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?

In the part b of the attached excel, we have:

Contribution margin for the Boat Fuel & Concessions line = $700,000

Contribution margin for the Winter Storage line = $1,200,000

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

From the part a of the attached excel file, we have:

Operating income before dropping Boat Maintenance service line = $815,000

Operating income after dropping Boat Maintenance service line = -$185,000

Cost saving = $815,000 - $185,000 = $630,000

Therefore, keeping Boat Maintenance service line by $630,000.