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? (Increase or decrease) by $