Carolina Flooring Product Line Contribution Margin Income Statement For the Year Product lines Sales revenue Wood flooring Laminate flooring Company Total 307,000 $ 136,000 $ 443,000 158,000 88,000 246,000 149,000 $ 48,000 $ 197,000 Less: Variable expenses Contribution margin Less fixed expenses: Manufacturing 76,000 58,000 61,000 13,000 137,000 71,000 Marketing and administrative 15,000 $ (26,000) $ (11,000) Operating income (loss) Top managers of Carolina Flooring are alarmed by their operating losses. They are considering dropping the laminate flooring product line. Company accountants have prepared the following analysis to help make this decision: (Click the icon to view the analysis.) Total fixed costs will not change if the company stops selling laminate flooring. Read the requirements. Requirement 1. Prepare an incremental analysis to show whether Carolina Flooring should discontinue the laminate flooring product line. Will discontinuing laminate flooring add $26,000 to operating income? Explain. (Enter a "0" in an input box if there is no expected change as a result of discontinuing the laminate flooring product in this scenario.) Incremental Analysis for Discontinuation Decision Total Contribution margin lost if laminate flooring product line is dropped Less: Fixed cost savings if laminate flooring product line is dropped Operating income vif laminate flooring is dropped Decision: It is to conclude that dropping laminate flooring would add $26,000 to operating income. If the company discontinues the laminate flooring product line, it vincur fixed expenses allocated to laminate flooring. Requirement 2. Assume that the company can avoid $27,000 of fixed expenses by discontinuing the laminate flooring product line (these costs are direct fixed costs of the laminate flooring product line). Prepare an incremental analysis to show whether the company should stop selling laminate flooring. (Enter a "0" in an input box if there is no expected change as a result of discontinuing the laminate flooring in this scenario.) Incremental Analysis for Discontinuation Decision Total Contribution margin lost if laminate flooring product line is dropped Less: Fixed cost savings if laminate flooring product line is dropped Operating income if laminate flooring is dropped Decision: because, assuming $27,000 of fixed expenses attributable to the laminate flooring product line can be avoided, the loss of contribution margin avoided, the loss of contribution margin _ the fixed cost savings. the fixed cost savings. Requirement 3. Now, assume that all of the fixed costs assigned to laminate flooring are direct fixed costs and can be avoided if the company stops selling laminate flooring. However, marketing has concluded that wood flooring sales would be adversely affected by discontinuing the laminate flooring line (retailers want to buy both from the same supplier). Wood flooring production and sales would decline 10%. What should the company do? Prepare an incremental analysis. (Enter a "0" in an input box if there is no expected change as a result of discontinuing the laminate flooring line in this scenario.) Incremental Analysis for Discontinuation Decision Total Laminate flooring contribution margin lost if laminate flooring product line is dropped Wood flooring contribution margin lost if laminate flooring product line is dropped Less: Fixed cost savings if laminate flooring product line is dropped Operating income Jif laminate flooring is dropped because, assuming that all fixed costs assigned to the laminate flooring product line can be avoided but that wood flooring production and sales would decline 10%, the loss of contribution Decision: margin the fixed cost savings
