Question

1. 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		Plank		Parquet		Total
   Sales revenue	$400,000		$200,000		$300,000		$900,000
   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:
   Machine rent	(5,000)		(20,000)		(50,000)		(75,000)
   Supervision	(15,000)		(10,000)		(20,000)		(45,000)
   Depreciation	(35,000)		(10,000)		(25,000)		(70,000)
   Segment margin	$120,000		$ 40,000		$ (45,000)		$115,000

   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

   2. List the relevant benefits and costs for keeping the parquet flooring line?

   Sales, variable cost, supervision cost and machine rent.

   3. Which alternative is more cost effective and by how much?
   Keep by $

Answer 1

3
Loss in contribution margin	-50000
Avoidable machine rent	30000
Avoidable supervision salaries	4700
Net change in income	-15300
Keep by $ 15300