Top managers of New York 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: E: (Click the icon to view the analysis.) New York Flooring Total fixed costs will not change if the company stops selling laminate flooring. Product Line Contribution Margin Income Statement Read the requirements. For the Year Product lines Requirement 1. Prepare an incremental analysis to show whether New York Flooring should discontinue the laminate flooring product line. Will discontinuing laminate flooring add $34,000 to operating income? Explain. (Enter a "0" in the laminate flooring product in this scenario.) Wood flooring Laminate flooring Company Total Incremental Analysis for Discontinuation Decision $ Sales revenue Total 302,000 $ 122,000 $ 424,000 150,000 Less: Variable expenses 80,000 230,000 Contribution margin lost if laminate flooring product line is dropped Less: Fixed cost savings if laminate flooring product line is dropped Contribution margin 152,000 $ 42,000 $ 194,000 Less fixed expenses: Operating income gained / lost if laminate flooring is dropped Manufacturing 72,000 59,000 131,000 Decision: drop flooring/ not drop Marketing and administrative 50,000 17,000 67,000 will still/ would not 30,000 $ (34,000) $ (4,000) It is to conclude that dropping laminate flooring would add $34,000 to operating income. If the company discontinues the laminate flooring product line, it incur fixed expenses allocated to laminate flooring. Operating income (loss) correct/incorrect Requirement 2. Assume that the company can avoid $35,000 of fixed expenses by discontinuing the laminate flooring product line (these costs are direct fixed costs of the laminate flooring product line). Prepare an incremental analysis to show whether the company should stop selling laminate flooring. (Enter a "0" in an input box if there is no expected change as a result of discontinuing the laminate flooring in this scenario.) Incremental Analysis for Discontinuation Decision Total Contribution margin lost if laminate flooring product line is dropped Less: Fixed cost savings if laminate flooring product line is dropped Operating income lost 7 gained if laminate flooring is dropped will still exceed / is nowless than Decision: drop do not drop because, assuming $35,000 of fixed expenses attributable to the laminate flooring product line can be avoided, the loss of contribution margin the fixed cost savings. Requirement 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? Prepare an incremental analysis. (Enter a "0" in an input box if there is no expected change as a result of discontinuing the laminate flooring line in this scenario.) Incremental Analysis for Discontinuation Decision Total Laminate flooring contribution margin lost if laminate flooring product line is dropped Wood flooring contribution margin lost if laminate flooring product line is dropped Less: Fixed cost savings if laminate flooring product line is dropped will still exceed/ is Operating income gained /lost if laminate flooring is dropped now less Decision drop / do not drop because, assuming that all fixed costs assigned to the laminate flooring product line can be avoided but that wood flooring production and sales would decline 10%, the loss of contribution margin the fixed cost savings
