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Peska company produces three products: A, B, and C. A segmented income statement is presented below:

	Product A ($000)	Product B ($000)	Product C ($000)	Total ($000)
Sales revenue	$1 280	$185	$300	$1765
Less: Variable cost	(1115)	(45)	225	(1385)
Contribution margin	$165	$140	$ 75	$380
Less: direct fixed costs
Depreciation	(50)	(15)	(10)	(75)
Supervisor salary	(95)	(85)	(80)	(260)
Segment margin	$ 20	$ 40	($15)	$ 45

Direct fixed expenses consist of depreciation and plant supervisor salary. Depreciation is a sunk cost.

REQUIRED:

Estimate the impact of Peskas overall profit if the product C is dropped. Assume that each of the three products has a different supervisor whose positions will remain even if the associated product was dropped. Explain why Peska should keep or drop Product C.

Calculate the impact of Peskas overall profit if the product C is dropped assuming that the product supervisors position will be eliminated if product C is dropped. Should Peska keep or drop product C? Why?

ANSWER:

	KEEP	DROP	DIFFERENTIAL

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