Top managers of Vermont 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: (Click the icon to view the analysis.) Total fixed costs will not change if the company stops selling laminate flooring. Read the requirements. Data table Requirement 1. Prepare an incremental analysis to show whether Vermont Flooring should discontinue the laminate flooring product line. Will discontinuing laminate flooring add $28,000 to operating income? Explain. (Enter a "0" in an input field as a result of discontinuing the laminate flooring product in this scenario.) Incremental Analysis for Discontinuation Decision Contribution margin lost if laminate flooring product line is dropped Less: Fixed cost savings if laminate flooring product line is dropped Operating income lost Total $ 46,000 $ 46,000 if laminate flooring is dropped Decision: Do not drop laminate flooring product line. It is incorrect to conclude that dropping laminate flooring would add $28,000 to operating income. If the company discontinues the laminate flooring product line, it will still incur fixed expenses allocated to laminate flooring. A B C D there is no expected change 1 2 Vermont Flooring Product Line Contribution Margin Income Statement 3 For the Year Product lines 4 Laminate 5 Wood flooring 6 Sales revenue $ 7 Less: Variable expenses 306,000 $ 156,000 flooring 128,000 $ 82,000 Company Total 434,000 238,000 $ 150,000 $ 46,000 $ 196,000 Requirement 2. Assume that the company can avoid $32,000 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 field if there is no expected change as a result of discontinuing the laminate flooring in this scenario.) lost Incremental Analysis for Discontinuation Decision Contribution margin lost if laminate flooring product line is dropped Less: Fixed cost savings if laminate flooring product line is dropped Operating income Total $ if laminate flooring is dropped $ 46,000 32,000 14,000 8 Contribution margin 9 Less fixed expenses: 10 Manufacturing 75,000 55,000 130,000 51,000 19.000 70,000 11 Marketing and administrative $ 24,000 $ (28,000) $ (4,000) 12 Operating income (loss) the fixed cost savings. Decision: Do not drop the laminate flooring product line because, assuming $32,000 of fixed expenses attributable to the laminate flooring product line can be avoided, the loss of contribution margin will still exceed 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 field if there is no expected change as a result of discontinuing the laminate flooring line in this scenario.) Incremental Analysis for Discontinuation Decision Laminate flooring contribution margin lost if laminate flooring product line is dropped Wood flooring contribution margin lost if laminate flooring product line is dropped Total $ 46,000 15,000 Less: Fixed cost savings. laminate flooring product line is dropped Fv22. I IVu :2 Juiniy- " TE----ae Iv"S FIV--Et HIS - TYPPTE Operating income gained Decision: Drop the laminate flooring product line 74,000 if laminate flooring is dropped $ 13,000 fixed cost savings. 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 is now less than the Print Done