Top managers of California Flooring are alarmed by their operating losses. They are considering dropping the laminate flooring product line. Company accountants have prepared the following analysis to help make this decision:

California Flooring

Product Line Contribution Margin Income Statement

For the Year

Product Lines

	Wood flooring	Laminate flooring	Company Total
Sales revenue	$300,000	$120,000	$420,000
Less: Variable expenses	150,000	86,000	236,000
Contribution margin	$150,000	$34,000	$184,000
Less fixed expenses:
Manufacturing	70,000	51,000	121,000
Marketing and administrative	58,000	13,000	71,000
Operating income (loss)	$22,000	$(30,000)	$(8,000)

Total fixed costs will not change if the company stops selling laminate flooring

1. Prepare an incremental analysis to show whether California Flooring should discontinue the laminate flooring product line. Will discontinuing laminate flooring add $30,000 to operate income? Explain.

2. Assume that the company can avoid $31,000 of fixed expenses by discontinuing the laminate flooring product line (these costs and direct fixed costs of the laminate flooring product line). Prepare an incremental analysis to show whether the company should stop selling laminate flooring.

3. Now, assume that all of the fixed costs assigned to laminate flooring are direct fixed costs and can be avoided if the company stops selling laminate flooring. However, marketing has concluded that wood flooring sales would be adversely affected by discontinuing the laminate flooring line (retailers want to buy both from the same supplier). Wood flooring production and sales would decline 10%. What should the company do?