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:

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

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Vermont Flooring Product Line Contribution Margin Income Statement For the Year Product lines Laminate flooring 128,000 $ 82,000 46,000 S Company Total 434,000 238,000 196,000 Wood flooring 306,000 S 156,000 150,000 $ Sales revenue Less: Variable expenses Contribution margin Less fixed expenses: Manufacturing Marketing and administrative Operating income (loss) 75,000 51,000 24,000 S 55,000 19,000 (28,000) $ 130,000 70,000 (4,000)