Question

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) (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 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 10% and sales of the plank line by 5%. 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?Contribution Margin Strip line $Plank line $2. Which alternative (keep or drop the parquet product line) is now more cost effective? Keep the parquet product line By how much?$

Answer 1

Answer:

Contribution margin for :

    STRIP PLANK     Income Statement

$ 360,000  $ 190,000 Total Net Sales

-$ 225,000 -$ 120,000 Variable Cost

$ 135,000    $ 70,000 Contributing Margin

It's more effective to keep the parquet product line, the company get

an extra return of $5,000.

Explanation:

With all the product line operating these are the results:

STRIP PLANK PARQUET Total Income Statement

$ 400,000 $ 200,000 $ 300,000 $ 900,000 Total Net Sales

-$ 225,000 -$ 120,000 -$ 250,000 -$ 595,000 Variable Cost

$ 175,000 $ 80,000 $ 50,000 $ 305,000    Contributing Margin

-$ 5,000  -$ 20,000 -$ 50,000 -$ 75,000 Machine Rent

-$ 15,000 -$ 10,000 -$ 20,000 -$ 45,000 Supervision

-$ 35,000 -$ 10,000 -$ 25,000 -$ 70,000 Depreciation

$ 120,000 $ 40,000 -$ 45,000 $ 115,000 Segment Margin

If the company keeps the parquet line will get worst result during the year.

STRIP PLANK PARQUET Total Income Statement

$ 360,000 $ 190,000 $ 0,000 $ 550,000 Total Net Sales

-$ 225,000 -$ 120,000 $ 0,000 -$ 345,000 Variable Cost

$ 135,000 $ 70,000 $ 0,000 $ 205,000 Contributing Margin

-$ 5,000 -$ 20,000 -$ 10,000 -$ 35,000 Machine Rent

-$ 15,000 -$ 10,000 $ 0,000 -$ 25,000 Supervision

-$ 35,000 -$ 10,000 $ 0,000 -$ 45,000 Depreciation

$ 80,000 $ 30,000 -$ 10,000 $ 100,000 Segment Margin