STRUCTURING A KEEP-OR-DROP PRODUCT LINE PROBLEM Shown below is a segmented income statement for Hickory Company’s three wooden flooring product lines:

Strip Plank Parquet Total Sales revenue $400 $200 $300 $900 Less: Variable expenses 225 120 250 595 Contribution margin $175 $ 80 $ 50 $305 Less direct fixed expenses:

Machine rent (5) (20) (30) (55)

Supervision (15) (10) (5) (30)

Depreciation (35) (10) (25) (70)

Segment margin $120 $ 40 $ (10) $150 Hickory is considering dropping its least profitable 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 $30,000 in machine rent and $5,000 in supervision salaries.

Required:

. List the alternatives being considered with respect to the parquet flooring line.

. List the relevant benefits and costs for each alternative.

. Which alternative is more cost effective and by how much?

Cornerstone Exercise