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).