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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:

Line Item DescriptionStripPlankParquetTotalSales revenue$381,000$218,000$313,000$912,000Less: Variable expenses225,000120,000250,000595,000Contribution margin$156,000$98,000$63,000$317,000Less direct fixed expenses: Machine rent(5,000)(20,000)(65,000)(90,000) Supervision(13,500)(9,000)(4,500)(27,000) Depreciation(42,000)(12,000)(30,000)(84,000)Segment margin$95,500$57,000$(36,500)$116,000

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 $63,000 (sales of $313,000 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 10% and sales of the plank line by 10%. All other information remains the same.

This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the questions below.

1. If the parquet product line is dropped, what is the contribution margin for the strip line? $___

2. For the plank line? $_____

3. Which alternative (keep or drop the parquet product line) is now more cost effective and by how much? $_____