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		$409,000			$180,000			$303,000			$892,000
Less: Variable expenses		210,000			120,000			235,000			565,000
Contribution margin		$199,000			$60,000			$68,000			$327,000
Less direct fixed expenses:
Machine rent		(6,000)			(24,000)			(67,000)			(97,000)
Supervision		(10,500)			(7,000)			(3,500)			(21,000)
Depreciation		(45,500)			(13,000)			(32,500)			(91,000)
Segment margin		$137,000			$16,000			$(35,000)			$118,000

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 $68,000 (sales of $303,000 less total variable costs of $235,000). 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.

1. If the parquet product line is dropped, what is the contribution margin for the strip line? $ 179,100 For the plank line? 54,000 2. Which alternative (keep or drop the parquet product line) is now more cost effective and by how much? Keep by $