Question

Top managers of California 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 (Click the icon to view the analysis.) Total fixed costs will not change it the company stops selling laminate flooring. Read the resuirements in an inpul box if there is no Requirement 1. Prepare an incremental analysis to show whether California Flooring should discontinue the laminate flooring product line. Will discontinuing laminate flooring andd $32,000 to operating income? Explain. (Enter a " expected change as a result of discontinuing the laminate flooring product in this scenario.) Total Incremental Analysis for Discontinuation Decision Contribution margin lost if laminate flooring product line is dropped Less: Fixed cost savings if laminate flooring product line is dropped Operating income if laminate flooring is dropped i Data Table Requirements Callfornia Flooring Product Line Contribution Margin Income Statement For the Year Product lines 1. Prepare an incremental analysis to show whether California Flooring should discontinue the laminate flooring product line. Will discontinuing laminate flooring add $32,000 to operating income? Explain. 2. Assume that the company can avoid $35,000 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 Foxed 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? Wood flooring Laminate flooring Company Total 302,000 $ 118.000 $ 420,000 154,000 78.000 230,000 Sales revenue 148,000 $ 42.000 $ 190,000 Less: Variable expenses Contribution margin Less fixed expenses Manufacturing Marketing and administrative 74,000 56,000 131,000 73.000 Print 57.000 17.000 (32.000) $ Done 18,000 $ (14,000) Operating income loss)

Answer 1

California Flooring Requirement 1 Total 42000 Incremental Analysis for Discontinuation Decision Contribution margin lost if laminate flooring product line is dropped Less: Fixed cost savings if laminate flooring product line is dropped Operating income lost if laminate flooring is dropped 42000 Do not drop laminate flooring product line. It is incorrect to conclude that dropping laminate flooring would add $32000 to operating income. If the company discontinues the laminate flooring product line, it will still incur fixed expenses allocated to laminate flooring. Requirement 2 Incremental Analysis for Discontinuation Decision Contribution margin lost if laminate flooring product line is dropped Less: Fixed cost savings if laminate flooring product line is dropped Operating income lost if laminate flooring is dropped Total 42000 -35000 7000 Do not drop the laminate flooring product line because, assuming $35000 of fixed expenses attributable to the laminate flooring product line can be avoided, the loss of contribution margin will still exceed the fixed cost savings. Requirement 3 Total 42000 Incremental Analysis for Discontinuation Decision Laminate flooring contribution margin lost if laminate flooring product line is dropped Wood flooring contribution margin lost if laminate flooring product line is dropped Less: Fixed cost savings if laminate flooring product line is dropped Operating income gained if laminate flooring is dropped 14800 -74000 17200 Drop the laminate flooring product line because, assuming that all fixed costs assigned to the laminate flooring product line can be avoided but that wood flooring production and sales would decline 10%, the loss of contribution margin is now less than the fixed cost savings.