Question

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 $Plank line $2. Which alternative (keep or drop the parquet product line) is now more cost effective? Keep the parquet product line By how much?$

Answer 1

If the parquet product line is dropped, the contribution margin for the strip line would be $157,500 and the contribution margin for the plank line would be $76,000. The more cost-effective alternative is to keep the parquet product line, with a cost effectiveness of $5,000.

Step-by-step explanation:

To determine the contribution margins for the strip line and the plank line if the parquet product line is dropped, we need to consider the effects of dropping the parquet line on the sales of the strip line and the plank line.

Given that dropping the parquet product line would reduce sales of the strip line by 10% and sales of the plank line by 5%, we can calculate the contribution margins as follows:

1. Contribution margin for the strip line = (Contribution margin without drop) - (Contribution margin without drop * reduction in sales of strip line)
   = $175,000 - ($175,000 * 0.10)
   = $175,000 - $17,500
   = $157,500
2. Contribution margin for the plank line = (Contribution margin without drop) - (Contribution margin without drop * reduction in sales of plank line)
   = $80,000 - ($80,000 * 0.05)
   = $80,000 - $4,000
   = $76,000

Therefore, the contribution margin for the strip line would be $157,500 and the contribution margin for the plank line would be $76,000 if the parquet product line is dropped.

Based on the information provided, the more cost-effective alternative would be to keep the parquet product line.

To calculate the cost effectiveness, we need to compare the segment margin with and without the parquet product line. The segment margin with the parquet product line is $115,000 and without the parquet product line is $120,000. Therefore, the cost effectiveness of keeping the parquet product line is $120,000 - $115,000 = $5,000.