In: Accounting
Structuring a Keep-or-Drop Product Line Problem
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.
Required:
1. List the alternatives being considered with
respect to the parquet flooring line.
2. List the relevant benefits and costs for keeping the parquet flooring line?
3. Which alternative is more cost
effective?
4 By how much?