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.
1. If the parquet product line is dropped, what is the contribution margin for the strip line?
2. Which alternative (keep or drop the parquet product line) is now more cost effective and by how much?
Keep by: $