Structuring a Keep-or-Drop Product Line Problem Shown below is a segmented incom

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Structuring a Keep-or-Drop Product Line Problem

Shown below is a segmented income statement for Hickory Company's three wooden flooring product lines:

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.

Required:

1. List the alternatives being considered with respect to the parquet flooring line.
Keep the parquet flooring line or drop it

Expand the parquet flooring line

Keep the parquet flooring line or drop it

Neither of these alternatives are being considered

2. Which alternative is more cost effective?
Drop the parquet flooring line

Drop the parquet flooring line

Keep the parquet flooring line

3. By how much?
$

Question three is the answer I am looking for. I already have the answers for question 1 and 2 in bold.

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

Explanation / Answer

Loss in contribution margin -50000 Avoidable fixed costs:    Machine rent 40000 (50000*80%)    Supervision 20000 Change in income 10000 Income will increase by $10000 if the parquet flooring line is dropped

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