90.2K

Verified Solution

Link Copied!

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 $400,000 225,000 $175,000 Plank Parquet Sales revenue Less: Variable expenses Contribution margin Less direct fixed expenses Total $900,000 595,000 $305,000 $200,000 $300,000 250,000 $50,000 120,000 80,000 Machine rent (5,000) (15,000) (35,000) $120,000 (20,000) (10,000) 10,000) $40,000 (50,000) (20,000) (25,000) $ (45,000) (75,000) (45,000) (70,000) $115,000 Supervision Depreciation Segment margin 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 $120,000 X 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? $99,700 X 40,000X

Answer & Explanation Solved by verified expert

See Answer