Question
Shown below is a segmented income statement for Hickory Company's three wooden flooring product lines: Strip Plank Parquet Total Sales revenue $402,000 $188,000 $301,000 $891,000
Shown below is a segmented income statement for Hickory Company's three wooden flooring product lines:
Strip | Plank | Parquet | Total | ||||||||
Sales revenue | $402,000 | $188,000 | $301,000 | $891,000 | |||||||
Less: Variable expenses | 220,000 | 120,000 | 245,000 | 585,000 | |||||||
Contribution margin | $182,000 | $68,000 | $56,000 | $306,000 | |||||||
Less direct fixed expenses: | |||||||||||
Machine rent | (5,000) | (20,000) | (54,000) | (79,000) | |||||||
Supervision | (19,500) | (13,000) | (6,500) | (39,000) | |||||||
Depreciation | (24,500) | (7,000) | (17,500) | (49,000) | |||||||
Segment margin | $133,000 | $28,000 | $(22,000) | $139,000 |
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 $56,000 (sales of $301,000 less total variable costs of $245,000). 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 15% and sales of the plank line by 10%. All other information remains the same.
This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the questions below.
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