Exercise 13-15

Refer to the information for Hickory Company on the previous page. Hickorys management is deciding whether to keep or drop the Parquet product line. Hickorys 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 $30,000 in machine rent and $5,000 in supervision salaries.

Required:

List the alternatives being considered with respect to the parquet flooring line.

List the relevant benefits and costs for each alternative.

Which alternative is more cost effective and by how much?

Exercise 13-16

Refer to the information for Hickory Company on the previous page. Assume that dropping the parquet product line would reduce sales of the strip line by 25 percent and sales of the plank line by 20 percent. All other information remains the same.

Required:

If the parquet product line is dropped, what is the contribution margin for the strip line? For the plank line?

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

Use the following information for Cornerstone Exercises 13-15 and 13-16: Shown below is a segmented income statement for Hickory Company's three wooden floor- ing product lines: Strip Plank Parquet Total Sales revenue Less: Variable expenses Contribution margin Less direct fixed expenses: $400,000 $200,000 $300,000 $900,000 595,000 $175,000 80,000 50,000 $305,000 225,000 120,000 250,000 Machine rent Supervision Depreciation (5,000) (20,000) (30,000) (55,000) (15,000) (10,000) (35,000) 120,000 10,000 40,000 (5,000) (30,000) 25.0001 70.000 $ (10,000) $150,000 Segment margin