Question

Structuring a Keep-or-Drop Product Line Problem Shown below is a segmented income statement for Hickory Company's three wooden flooring product lines: Strip Total Plank Parquet Sales revenue $400,000 $200,000 $900,000 $300,000 Less: Variable expenses 225,000 120,000 250,000 595,000 Contribution margin $175,000 $80,000 $50,000 $305,000 Less direct fixed expenses: |(5,000) (50,000) (75,000) Machine rent (20,000) (20,000) (15,000) (10,000) (45,000) Supervision (35,000) (10,000) (70,000) Depreciation (25,000) $ 40,000 $120,000 $(45,000) $115,000 Segment margin Hickory's management is deciding whether to keep or drop the parquet product line. Hickory's parquet flooring product line has a contribution margin of $50,000 (sales of $300,000 less total variable costs of $250,000). All variable costs are relevant. Relevant fixed costs associated with this line include $30,000 in machine rent and $4,700 in supervision salaries. Required: 1. List the alternatives being considered with respect to the parquet flooring line. Drop the parquet flooring line or keep it v 2. List the relevant benefits and costs for keeping the parquet flooring line? Sales, variable cost, supervision cost and machine rent. V 3. Which alternative is more cost effective and by how much? 11,500 X by Keep Feedback Y Check My Work 1. & 2. Set up four columns. First column lists the income statement information. Second and third columns are for alternatives, keep or drop, and list all amounts. Fourth column is the differential amount to keep.

Answer 1

	Parquet
	Sales	300000
	Variable cost	250000
	Contribution Margin	50000
	Less: Relevant Fixed cost -Machine Rent	-30000
	Less: Supervision Salaries	-4700
	Increased income	15300
	Parquet Product line would be keep it because it is cost effective by $15300