tructuring 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 Description	Strip	Plank	Parquet	Total
Sales revenue	$404,000	$193,000	$297,000	$894,000
Less: Variable expenses	225,000	110,000	250,000	585,000
Contribution margin	$179,000	$83,000	$47,000	$309,000
Less direct fixed expenses:
Machine rent	(7,000)	(28,000)	(46,000)	(81,000)
Supervision	(15,000)	(10,000)	(5,000)	(30,000)
Depreciation	(42,000)	(12,000)	(30,000)	(84,000)
Segment margin	$115,000	$33,000	$(34,000)	$114,000

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 $47,000 (sales of $297,000 less total variable costs of $250,000). All variable costs are relevant.

Relevant fixed costs associated with this line include 70% 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 20% and sales of the plank line by 5%. All other information remains the same.