Top managers of Vermont Flooring are alarmed by their operating losses. They are
ID: 2553452 • Letter: T
Question
Top managers of Vermont Flooring are alarmed by their operating losses. They are considering dropping the laminate flooring product line. Company accountants have prepared the following analysis to help make this decision:
Total fixed costs will not change if the company stops selling laminate flooring.
Requirements
1. Prepare an incremental analysis to show whether Vermont Flooring should discontinue the laminate flooring product line. Will discontinuing laminate flooring add $28,000 to operating income? Explain.
2. Assume that the company can avoid $32,000 of fixed expenses by discontinuing the laminate flooring product line (these costs are direct fixed costs of the laminate flooring product line). Prepare an incremental analysis to show whether the company should stop selling laminate flooring.
3. Now, assume that all of the fixed costs assigned to laminate flooring are direct fixed costs and can be avoided if the company stops selling laminate flooring. However, marketing has concluded that wood flooring sales would be adversely affected by discontinuing the laminate flooring line (retailers want to buy both from the same supplier). Wood flooring production and sales would decline 10%. What should the company do?
Explanation / Answer
Solution 1:
Discontinuing laminate flooring will not add $28,000 to operating income. In fact, overall operating income will decrease by $46,000 by discontinuing laminate flooring, therefore laminate flooring should not be discontinued.
Solution 2:
As operating income will decrease by $14,000 if company stop selling laminate flooring. Therefore company should continue to sell laminate flooring.
Solution 3:
As net operating income will increase by $13,000 if company stop selling laminate flooring, therefore company should discontinue this product line.
Incremental Analysis - Continue Laminate Flooring (Alt 1) or Discontinue Laminate Flooring (Alt 2) Particulars Continue Laminate Flooring Discontinue Laminate Flooring Net Income Increase (Decrease) - Alt 2 Amount Amount Sales $434,000.00 $306,000.00 -$128,000.00 Variable Cost $238,000.00 $156,000.00 -$82,000.00 Contribution $196,000.00 $150,000.00 -$46,000.00 Fixed Expenses: Manufacturing $130,000.00 $130,000.00 $0.00 Marketing and adminstrative $70,000.00 $70,000.00 $0.00 Net Income -$4,000.00 -$50,000.00 -$46,000.00