Structuring a Keep-or-Drop Product Line Problem with Complementary Effects

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) (30,000) (55,000)

Supervision (15,000) (10,000) (5,000) (30,000)

Depreciation (35,000) (10,000) (25,000) (70,000)

Segment margin $120,000 $ 40,000 $ (10,000) $150,000

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. In addition, assume that dropping the parquet product line would reduce sales of the strip line by 30% and sales of the plank line by 20%. 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?