$200,000 $300,00 120,000 250,00 $ 80,000 $ 50,00 (20,000) (30,00

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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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 27% 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?
by $
Transcribed Image Text: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 27% 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? by $
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