Question

OBJECT arief Exercise 8-19 Structuring a Keep-or-Drop Product-Line Problem 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 80% of parquet's machine rent and all of parquet's supervision salaries. (Continued) Example

Answer 1

Answer 1

The alternatives are

• Keep the Parquet product line
• Drop the Parquet product line

Answer 2

	Keep the Parquet product line	Drop the Parquet product line
Relevant benefits
Sales	$                                       300,000	$                                                 -
Relevant Costs
Variable costs	$                                       250,000	$                                                 -
Fixed Cost	$                                         95,000	$                                         35,000*
Total Relevant Costs	$                                       345,000	$                                         35,000
Net benefit	$                                       (45,000)	$                                       (35,000)

* ($ 50,000*0.2) + $ 25,000 = $35,000

Answer 3

Drop the Parquet product line is better by $ 10,000.

In case of any doubt, please comment.