Shown below is a segmented income statement for Hickory Company’s three wooden flooring product lines:

Refer to the information for Hickory Company above. 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?
2. Which alternative (keep or drop the parquet product line) is now more cost effective and by how much?

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Sales revenue Less: Variable expenses Contribution margin Less direct fixed expenses: Machine rent Supervision Depreciation Segment margin Strip $400,000 225,000 $175,000 5,000 15,000 35,000 $120,000 Plank $200,000 120,000 $ 80,000 20,000 10,000 10,000 $ 40,000 Parquet $300,000 250,000 $ 50,000 50,000 20,000 25,000 $(45,000) Total $900,000 595,000 $305,000 75,000 45,000 70,000 $115,000