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 Sales revenue Total $300,000 Less: Variable expenses $400,000 225,000 $175,000 $200,000 120,000 $ 80,000 $900,000 595,000 $305,000 250,000 $ 50,000 Contribution margin 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 30% and sales of the plank line by 20%. All other information remains the same. Required: Previous Next Less direct fixed expenses: Machine rent Supervision (5,000) (15,000) (35,000) $120,000 (30,000) (5,000) (25,000) $(10,000) (10,000) (10,000) $ 40,000 Depreciation (55,000) (30,000) (70,000) $150,000 Segment margin 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 30% 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? by S Previous Next >