Cornerstone Exercises 23-16 and 23-17

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Use the following information for Cornerstone Exercises 23-16 and 23-17:

Shown below is a segmented income statement for Hickory Company's three wooden flooring product lines:

Cornerstone Exercise 23-16 Structuring a Keep-or-Drop Product Line Problem

OBJECTIVE 2
CORNERSTONE 23-3

Refer to the information for Hickory Company above. 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 $30,000 in machine rent and $5,000 in supervision salaries.

Required:

1.      List the alternatives being considered with respect to the parquet flooring line.

2.      List the relevant benefits and costs for each alternative.

3.      Which alternative is more cost effective and by how much?

Cornerstone Exercise 23-17 Structuring a Keep-or-Drop Product Line Problem with Complementary Effects

OBJECTIVE 2
CORNERSTONE 23-4

Refer to the information for Hickory Company above. Assume that dropping the parquet product line would reduce sales of the strip line by 25 percent and sales of the plank line by 20 percent. 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?