Question

Top managers of pennsylvania Flooring are alarmed by their operating losses. They are considering dropping the laminate flooring product line. Company accountants have prepared the following analysis to help make this​ decision:

Total fixed costs will not change if the company stops selling laminate flooring

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0 Requirements 1. Prepare an incremental analysis to show whether Pennsylvania Flooring should discontinue the laminate flooring product line. Will discontinuing laminate flooring add $33,000 to operating income? Explain. 2. Assume that the company can avoid $34,000 of fixed expenses by discontinuing the laminate flooring product line (these costs are direct fixed costs of the laminate flooring product line). Prepare an incremental analysis to show whether the company should stop selling laminate flooring. 3. Now, assume that all of the fixed costs assigned to laminate flooring are direct fixed costs and can be avoided if the company stops selling laminate flooring. However, marketing has concluded that wood flooring sales would be adversely affected by discontinuing the laminate flooring line (retailers want to buy both from the same supplier). Wood flooring production and sales would decline 10%. What should the company do? Print Done

Answer 1

1)

Particular	Amount
Contribution margin lost if laminate flooring product line is dropped	$ 44,000
Less: Fixed cost savings if laminate flooring product line is dropped	$ 0
Operating Income lost if laminate flooring product line is dropped	$ 44,000

No, company should not dropped laminate flooring product line as it decreases operating income by $ 44,000

2)

Particular	Amount
Contribution margin lost if laminate flooring product line is dropped	$ 44,000
Less: Fixed cost savings if laminate flooring product line is dropped	$ 34,000
Operating income lost if laminate flooring product line is dropped	$ 10,000

No, company should not stop selling laminate flooring as it decreases operating profit of company by $ 10,000

3)

Particular	Amount
Contribution margin lost if laminate flooring product line is dropped	$ 44,000
Congtribution margin lost of wooded flooring due to laminate flooring is dropped ($ 146,000 * 10%)	$ 14,600
Total Contribution Margin Loss	$ 58,600
Less: Fixed Cost Savings	$ 77,000
Operating income add if laminate flooring is dropped	$ 18,400

Yes, company should dropped laminate flooring as it increases operating income of company by $ 18,400.