Question

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 (10,000) (20,000) (45,000) (15,000) (35,000) Depreciation (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? Drop X by $ 10,000 x

Answer 1

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Hickory Company
Answer 3
If Hickory keeps parquet flooring then there is net loss of $ 45,000.
Calculation of net income/ loss if parquet flooring is dropped:
	$
Segment margin	(45,000.00)
Add:
Savings in machine rent	30,000.00
Savings in supervision salaries	4,700.00
Less:
Loss of contribution	50,000.00
Revised margin	(60,300.00)
If parquet flooring is dropped then company will have net loss of $ 60,300. So its better to keep the division as net loss is $ 45,000 then which is less than $ 60,300.
It is cost effective by $ 15,300.