Structuring a Keep-or-Drop Product Line Problem with Complementary Effects
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) | (30,000) | (55,000) | |||
Supervision | (15,000) | (10,000) | (5,000) | (30,000) | |||
Depreciation | (35,000) | (10,000) | (25,000) | (70,000) | |||
Segment margin | $120,000 | $ 40,000 | $ (10,000) | $150,000 |
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 80% of parquet's machine rent and all of parquet's supervision salaries. In addition, assume that dropping the parquet product line would reduce sales of the strip line by 22% and sales of the plank line by 20%. All other information remains the same.
Required:
1. If the parquet product line is dropped, what
is the contribution margin for the strip line?
$
For the plank line?
$
2. Which alternative (keep or drop the parquet
product line) is now more cost effective and by how much?
( Keep or drop ) by $
ANSWER
Answer 1. | ||
Parquet Product line is Dropped. | ||
Contribution Margin: | ||
Strip Line - $175,000 X 78% | 136,500 | |
Planl Line - $80,000 X 80% | 64,000 | |
Answer 2. | ||
Statement of Incremental Profit (Loss) | ||
If Parquet Product Line is dropped | ||
Incremental Revenue: | ||
Saving in Fixed Costs: | ||
Machine Rent - $50,000 X 80% | 40,000 | |
Supervision Salary | 5,000 | 45,000 |
Incremental Cost | ||
Loss of Contribution: | ||
Parquet - 100% | 50,000 | |
Strip - $175,000 X 22% | 38,500 | |
Plank - $80,000 X 20% | 16,000 | 104,500 |
Net Incremental Profit (Loss) | (59,500) | |
Keep the Parquet product Line. |
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Structuring a Keep-or-Drop Product Line Problem with Complementary Effects Shown below is a segmented income statement...
Structuring a Keep-or-Drop Product Line Problem with Complementary Effects 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) (30,000) (55,000) Supervision (15,000) (10,000) (5,000) (30,000) Depreciation (35,000) (10,000) (25,000) (70,000) Segment margin $120,000 $ 40,000 $ (10,000) $150,000 Hickory's management is...
Structuring a keep-or-Drop Product Line Problem with Complementary Effects Shown below is a segmented income statement for Hickory Company's three wooden flooring product lines: Strip Plank Parquet Total Sales revenue $400,000 $300,000 $200,000 120,000 $900,000 595,000 Less: Variable expenses 225,000 250,000 Contribution margin $175,000 $ 80,000 $ 50,000 $305,000 Less direct fixed expenses: Machine rent (5,000) (20,000) (30,000) (55,000) Supervision (15,000) (10,000) (5,000) (30,000) Depreciation (35,000) (10,000) (25,000) (70,000) Segment margin $120,000 $ 40,000 $ (10,000) $150,000 $ Hickory's management...
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...
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...
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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...
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