Use the following information for Cornerstone Exercises 23-16 and 23-17: Shown b
ID: 2371050 • Letter: U
Question
Use the following information for Cornerstone Exercises 23-16 and 23-17:
Shown below is a segmented income statement for Hickory Company's three wooden flooring product lines:
OBJECTIVE 2
CORNERSTONE 23-3
Refer to the information for Hickory Company above. 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 $5,000 in supervision salaries.
Required:
OBJECTIVE 2
CORNERSTONE 23-4
Refer to the information for Hickory Company above. Assume that dropping the parquet product line would reduce sales of the strip line by 25 percent and sales of the plank line by 20 percent. All other information remains the same.
Required:
Explanation / Answer
HI,
There was a small error in the previous answer. Please find the answer as follows:
Total Segment Income if the Parquet Flooring Line is Dropped:
= 120000 + 40000 - 35000 = 125000
Total Segment Income if the Parquet Flooring Line is Kept = 150000
Resulting in a net loss of 25000 if the line is dropped. It is so, because company will continue to incurr the relevant fixed costs of 35000 towards machine rent and supervision even if the the product line is dropped.
Product Line should be continued.
Objective 2:
Part A:
New Contribution for Strip after the decline in sales = 175000 - .25*(175000) = 131250
New Contribution for Plank = 80000 - .20*(80000) = 64000
Therefore, the total contribution would be = 131250 + 64000 = 195250
Part B:
It is advisable to keep the product line as company's total income will be higher by 74750 if the product line is continued.
Keep Drop Amount for Keeping the Product Line
Contribution 305000 195250 109750 Machine Rent 55000 25000 30000 Supervision 30000 25000 5000 Total 220000 145250 74750