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		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

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 10% and sales of the plank line by 5%. 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?

	Contribution Margin
Strip line	$fill in the blank 1
Plank line	$fill in the blank 2

Strip line does not equal 200,000 nor 122,500

Plank line does not equal 120,000 nor 64,000

2. Which alternative (keep or drop the parquet product line) is now more cost effective?

Keep the parquet product line

3. By how much? $fill in the blank 3

By how much does not equal -45,000 nor 83,500