Exercise 13–29
If Petoskey drops Conway, profit will decrease by $75,000 as a result of the lost
contribution margin ($300,000 – $225,000). Note that the direct fixed expense for
depreciation is a sunk cost and not relevant to the decision (i.e., it will remain
unchanged whether Conway is kept or dropped). In addition, Petoskey will avoid
the $80,000 supervisory salary cost if it drops Conway. Therefore, the overall
impact of dropping Conway is that profit decreases by the 75,000 lost
contribution margin but increases by the lost supervisory salary of $80,000,
which is a net increase in profit of $5,000. Therefore, Petoskey should drop
Conway because profits are higher without Conway than with Conway.
Exercise 13–30
If Petoskey drops Conway, profit will decrease by $75,000 as a result of the lost
contribution margin ($300,000 – $225,000). Note that the direct fixed expense for
depreciation is a sunk cost and not relevant to the decision (i.e., it will remain
unchanged whether Conway is kept or dropped). In addition, Petoskey will avoid
the $80,000 supervisory salary cost if it drops Conway. Finally, if Petoskey drops
Conway, 20% of Alanson’s contribution margin, or $33,000 (i.e., .20 × $165,000),
will also be lost as Conway customers shop elsewhere for Alanson.
Therefore, the overall impact of dropping Conway is that profit decreases by the