A

B

C

D

1

Ohio Flooring

2

Product Line Contribution Margin Income Statement

3

For the Year

4

Product lines

5

Wood flooring

Laminate flooring

Company Total

6

Sales revenue

$303,000

$122,000

$425,000

7

Less: Variable expenses

157,000

78,000

235,000

8

Contribution margin

$146,000

$44,000

$190,000

9

Less fixed expenses:

10

Manufacturing

78,000

61,000

139,000

11

Marketing and administrative

58,000

15,000

73,000

12

Operating income (loss)

$10,000

$(32,000)

$(22,000)

Requirement 1. Prepare an incremental analysis to show whether

Ohio FlooringOhioFlooring

should discontinue the laminate flooring product line. Will discontinuing laminate flooring add

$ 32 comma 000$32,000

to operating income? Explain. (Enter a "0" in an input field if there is no expected change as a result of discontinuing the laminate flooring product in this scenario.)

Incremental Analysis for Discontinuation Decision	Total
Contribution margin lost if laminate flooring product line is dropped
Less: Fixed cost savings if laminate flooring product line is dropped
Operating income		if laminate flooring is dropped

Part 2Decision:

Drop laminate flooring product line.

Do not drop laminate flooring product line.

Part 3It is

correct

incorrect

to conclude that dropping laminate flooring would add

$ 32 comma 000$32,000

to operating income. If the company discontinues the laminate flooring product line, it

will still

would not

incur fixed expenses allocated to laminate flooring.Part 4Requirement 2. Assume that the company can avoid

$ 37 comma 000$37,000

of fixed expenses by discontinuing the laminate flooring product line (these costs are direct fixed costs of the laminate flooring product line). Prepare an incremental analysis to show whether the company should stop selling laminate flooring. (Enter a "0" in an input field if there is no expected change as a result of discontinuing the laminate flooring in this scenario.)

Incremental Analysis for Discontinuation Decision	Total
Contribution margin lost if laminate flooring product line is dropped
Less: Fixed cost savings if laminate flooring product line is dropped
Operating income		if laminate flooring is dropped

Part 5Decision:

Drop the laminate flooring product line

Do not drop the laminate flooring product line

because, assuming

$ 37 comma 000$37,000

of fixed expenses attributable to the laminate flooring product line can be avoided, the loss of contribution margin

will still exceed

is now less than

the fixed cost savings.Part 6Requirement 3. Now, assume that all of the fixed costs assigned to laminate flooring are direct fixed costs and can be avoided if the company stops selling laminate flooring. However, marketing has concluded that wood flooring sales would be adversely affected by discontinuing the laminate flooring line (retailers want to buy both from the same supplier). Wood flooring production and sales would decline 10%. What should the company do?Prepare an incremental analysis. (Enter a "0" in an input field if there is no expected change as a result of discontinuing the laminate flooring line in this scenario.)

Incremental Analysis for Discontinuation Decision	Total
Laminate flooring contribution margin lost if laminate flooring product line is dropped
Wood flooring contribution margin lost if laminate flooring product line is dropped
Less: Fixed cost savings if laminate flooring product line is dropped
Operating income		if laminate flooring is dropped

Part 7Decision:

Do not drop the laminate flooring product line

Drop the laminate flooring product line

because, assuming that all fixed costs assigned to the laminate flooring product line can be avoided but that wood flooring production and sales would decline 10%, the loss of contribution margin

is now less than

will still exceed

the fixed cost savings.