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	$400,000		$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.

Required:

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

Keep the parquet flooring line or drop it

• Expand the parquet flooring line
• Keep the parquet flooring line or drop it
• Neither of these alternatives are being considered

2. Which alternative is more cost effective?

Drop the parquet flooring line

• Drop the parquet flooring line
• Keep the parquet flooring line

By how much? $