Structuring a Keep-or-Drop Product Line Problem Shown below is a segmented income statement for Orzo Company's three laminated 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) (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 Orzo's management is deciding whether to keep or drop the parquet product line. Orzo'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 $4,700 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 keeping the parquet flooring line? 3. Which alternative is more cost effective and by how much? by
Structuring a Keep-or-Drop Product Line Problem Shown below is a segmented income statement for Orzo Company's three laminated 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) (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 Orzo's management is deciding whether to keep or drop the parquet product line. Orzo'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 $4,700 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 keeping the parquet flooring line? 3. Which alternative is more cost effective and by how much? by
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Structuring a Keep-or-Drop Product Line Problem
Shown below is a segmented income statement for Orzo Company's three laminated 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) | (50,000) | (75,000) | |||
| Supervision | (15,000) | (10,000) | (20,000) | (45,000) | |||
| |
(35,000) | (10,000) | (25,000) | (70,000) | |||
| Segment margin | $120,000 | $ 40,000 | $ (45,000) | $115,000 |
Orzo's management is deciding whether to keep or drop the parquet product line. Orzo'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 $4,700 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 keeping the parquet flooring line?
3. Which alternative is more cost effective and by how much?
by
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