Shown below is a segmented income statement for Hickory Company’s Kitchen Set product lines: Teflon Spatula Roaster 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) (50,000) (75,000) Supervision (15,000) (10,000) (20,000) (45,000) Depreciation (35,000) (10,000) (25,000) (70,000) Segment Margin $ 120,000 $ 40,000 $ (45,000) $ 115,000 Refer to the information for Hickory Company above. Hickory’s management is deciding whether to keep or drop the Roaster 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 Roaster’s machine rent and all of Roaster’s supervision salaries. Required: 1. Would you recommend the company to drop the Roaster Product line? Support your answer with appropriate computations. 2. There is additional information that the elimination of the Roaster line would result in a 20% decrease in the sales of the Spatula line. Do you think the company should drop the Roaster line? 3. List other factors that Hickory should consider in deciding whether to drop the Roaster line (at least 2 factors).
Shown below is a segmented income statement for Hickory Company’s Kitchen Set
product lines:
Teflon Spatula Roaster 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) (50,000) (75,000)
Supervision (15,000) (10,000) (20,000) (45,000)
Segment Margin $ 120,000 $ 40,000 $ (45,000) $ 115,000
Refer to the information for Hickory Company above. Hickory’s management is deciding whether to keep
or drop the Roaster 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 Roaster’s machine rent and all of Roaster’s
supervision salaries.
Required:
1. Would you recommend the company to drop the Roaster Product line? Support your answer with
appropriate computations.
2. There is additional information that the elimination of the Roaster line would result in a 20%
decrease in the sales of the Spatula line. Do you think the company should drop the Roaster line?
3. List other factors that Hickory should consider in deciding whether to drop the Roaster line (at
least 2 factors).
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