In: Accounting
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) | (30,000) | (55,000) | |||
Supervision | (15,000) | (10,000) | (5,000) | (30,000) | |||
Depreciation | (35,000) | (10,000) | (25,000) | (70,000) | |||
Segment margin | $120,000 | $ 40,000 | $ (10,000) | $150,000 |
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. In addition, assume that dropping the parquet product line would reduce sales of the strip line by 27% and sales of the plank line by 20%. All other information remains the same.
1. If the parquet product line is dropped, what is the contribution margin for the strip line?
2. Which alternative (keep or drop the parquet product line) is now more cost effective and by how much?
Keep by: $
1) | |
Strip line (175000*73%) | $ 1,27,750.00 |
Plank line (80000*80%) | $ 64,000.00 |
2) | |
Segment margin if keep the parquet line (given) = $150000 | $ 1,50,000.00 |
Segment margin if drop the parquet line: | |
Segment marging from strip line (120000-(175000-127750)) | $ 72,750.00 |
Segment marging from Plank line (40000-(80000-64000)) | $ 24,000.00 |
Unavoidable fixed costs (25000+(30000*20%)) | $ 31,000.00 |
Net Segment margin if drop the parquet line (72750+24000-31000) | $ 65,750.00 |
It is suggested to keep the parquet line because it is more cost effective by $84250 | =(150000-65750) |