Question
In: Accounting
Structuring a Keep-or-Drop Product Line Problem with Complementary Effects Shown below is a segmented income statement...
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 | 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 21% and sales of the plank line by 20%. 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?
$
2. Which alternative (keep or drop the parquet
product line) is now more cost effective and by how much?
Keep by $
Solutions
Expert Solution
Question 1:
| Strip | Plank | |
| Sales revenue | $ 316,000.00 | $ 160,000.00 |
| Less: Variable expenses | $ 177,750.00 | $ 96,000.00 |
| Contribution margin | $ 138,250.00 | $ 64,000.00 |
* Sales Revenue = 400000*0.79 = 316,000 , 200000*0.8 = 160,000
Variable Expenses =225000*0.79 = 177,750 , 120000*0.8 = 96,000
Question 2:
If we discontinue parquet product line:
| Strip | Plank | Parquet | Total | |
| Sales revenue | $ 316,000.00 | $ 160,000.00 | $ 300,000.00 | $ 776,000.00 |
| Less: Variable expenses | $ 177,750.00 | $ 96,000.00 | $ 250,000.00 | $ 523,750.00 |
| Contribution margin | $ 138,250.00 | $ 64,000.00 | $ 50,000.00 | $ 252,250.00 |
| Less direct fixed expenses: | ||||
| Machine rent | $ (5,000.00) | $ (20,000.00) | $ (6,000.00) | $ (31,000.00) |
| Supervision | $ (15,000.00) | $ (10,000.00) | $ - | $ (25,000.00) |
| Depreciation | $ (35,000.00) | $ (10,000.00) | $ (25,000.00) | $ (70,000.00) |
| Segment margin | $ 83,250.00 | $ 24,000.00 | $ 19,000.00 | $ 126,250.00 |
If We don't dis continue:
| Strip | Plank | Parquet | Total | |
| Sales revenue | $ 400,000.00 | $ 200,000.00 | $ 300,000.00 | $ 900,000.00 |
| Less: Variable expenses | $ 225,000.00 | $ 120,000.00 | $ 250,000.00 | $ 595,000.00 |
| Contribution margin | $ 175,000.00 | $ 80,000.00 | $ 50,000.00 | $ 305,000.00 |
| Less direct fixed expenses: | ||||
| Machine rent | $ (5,000.00) | $ (20,000.00) | $ (30,000.00) | $ (55,000.00) |
| Supervision | $ (15,000.00) | $ (10,000.00) | $ (5,000.00) | $ (30,000.00) |
| Depreciation | $ (35,000.00) | $ (10,000.00) | $ (25,000.00) | $ (70,000.00) |
| Segment margin | $ 120,000.00 | $ 40,000.00 | $ (10,000.00) | $ 150,000.00 |
Keeping the parquet product line is the better option, as we will earn extra $23,750 (150,000-126,250)
ekkarill92 answered 2 years agoRelated Solutions
Structuring a Keep-or-Drop Product Line Problem with Complementary Effects Shown below is a segmented income statement...
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
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...
Structuring a Keep-or-Drop Product Line Problem with Complementary Effects Shown below is a segmented income statement...
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
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...
Structuring a Keep-or-Drop Product Line Problem Shown below is a segmented income statement for Hickory Company's...
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...
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Keep-or-Drop Decision
Petoskey Company produces three products: Alanson, Boyne, and
Conway. A segmented income statement, with amounts given in
thousands, follows:
Alanson
Boyne
Conway
Total
Sales revenue
$1,280
$185
$375
$1,840
Less: Variable expenses
1,115
45
300
1,460
Contribution margin
$165
$140
$75
$380
Less direct fixed expenses:
Depreciation
50
15
15
80
Salaries
95
85
80
260
Segment margin
$20
$40
$(20)
$40
Direct fixed expenses consist of depreciation and plant
supervisory salaries. All depreciation on the equipment is...
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Alanson, Boyne, and Conway. A segmented income statement, with
amounts given in thousands, follows: Alanson Boyne Conway Total
Sales revenue $1,280 $185 $285 $1,750 Less: Variable expenses 1,115
45 228 1,388 Contribution margin $165 $140 $57 $362 Less direct
fixed expenses: Depreciation 50 15 15 80 Salaries 95 85 72 252
Segment margin $20 $40 $(30) $30 Direct fixed expenses consist of
depreciation and plant supervisory salaries. All depreciation on
the equipment is...
Keep-or-Drop Decision Petoskey Company produces three products: Alanson, Boyne, and Conway. A segmented income statement, with...
Keep-or-Drop Decision
Petoskey Company produces three products: Alanson, Boyne, and
Conway. A segmented income statement, with amounts given in
thousands, follows:
Alanson
Boyne
Conway
Total
Sales revenue
$1,280
$185
$405
$1,870
Less: Variable expenses
1,115
45
304
1,464
Contribution margin
$165
$140
$101
$406
Less direct fixed expenses:
Depreciation
50
15
11
76
Salaries
95
85
112
292
Segment margin
$20
$40
$(22)
$38
Direct fixed expenses consist of depreciation and plant
supervisory salaries. All depreciation on the equipment is...
Keep-or-Drop for Service Firm, Complementary Effects, Traditional Analysis Devern Assurance Company provides both property and automobile...
Keep-or-Drop for Service Firm, Complementary Effects,
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Devern Assurance Company provides both property and automobile
insurance. The projected income statements for the two products are
as follows:
Property
Insurance
Automobile
Insurance
Sales
$4,200,000
$12,000,000
Less variable expenses
3,830,000
9,600,000
Contribution margin
$370,000
$2,400,000
Less direct fixed expenses
400,000
500,000
Segment margin
$(30,000)
$1,900,000
Less common fixed expenses (allocated)
100,000
200,000
Operating income (loss)
$(130,000)
$1,700,000
The president of the company is considering dropping the
property insurance. However, some policyholders...
Keep-or-Drop for Service Firm, Complementary Effects, Traditional Analysis Devern Assurance Company provides both property and automobile...
Keep-or-Drop for Service Firm, Complementary Effects,
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Devern Assurance Company provides both property and automobile
insurance. The projected income statements for the two products are
as follows:
Property
Insurance
Automobile
Insurance
Sales
$4,200,000
$12,000,000
Less variable expenses
3,830,000
9,600,000
Contribution margin
$370,000
$2,400,000
Less direct fixed expenses
400,000
500,000
Segment margin
$(30,000)
$1,900,000
Less common fixed expenses (allocated)
100,000
200,000
Operating income (loss)
$(130,000)
$1,700,000
The president of the company is considering dropping the
property insurance. However, some policyholders...
Keep-or-Drop for Service Firm, Complementary Effects, Traditional Analysis Devern Assurance Company provides both property and automobile...
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Traditional Analysis Devern Assurance Company provides both
property and automobile insurance. The projected income statements
for the two products are as follows: Property Insurance Automobile
Insurance Sales $4,200,000 $12,000,000 Less variable expenses
3,830,000 9,600,000 Contribution margin $370,000 $2,400,000 Less
direct fixed expenses 400,000 500,000 Segment margin $(30,000)
$1,900,000 Less common fixed expenses (allocated) 100,000 200,000
Operating income (loss) $(130,000) $1,700,000 The president of the
company is considering dropping the property insurance. However,
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Shown as follows is a segmented income statement for Drexel-Hall during the current month. Profit Centers...
Shown as follows is a segmented income statement for Drexel-Hall
during the current month.
Profit Centers
Drexel-Hall
Store 1
Store 2
Store 3
Dollars
%
Dollars
%
Dollars
%
Dollars
%
Sales
$
1,800,000
100
%
$
600,000
100
%
$
600,000
100
%
$
600,000
100
%
Variable costs
1,080,000
60
372,000
62
378,000
63
330,000
55
Contribution margin
$
720,000
40
%
$
228,000
38
%
$
222,000
37
%
$
270,000
45
%
Traceable fixed costs: controllable...
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