Brief Exercise 8-21 Structuring a Keep-or-Drop Product-Line Problem Refer to the information for Hickory Company. 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.

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

Required:
1. List the alternatives being considered with respect to the parquet flooring line.
2. List the relevant benefits and costs for each alternative.
3. Which alternative is more cost effective and by how much?

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