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:

StripPlankParquetTotalSales revenue$400,000$200,000$300,000$900,000Less: Variable expenses225,000120,000250,000595,000Contribution margin$175,000$ 80,000$ 50,000$305,000Less 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 28% 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?

$. fill in the blank

For the plank line?

$. fill in the blank

2.Which alternative (keep or drop the parquet product line) is now more cost effective and by how much?

by $. fill in the blank