Builders SdnBhd offers three products for the construction industry: blocks, bricks and tiles. The following income statement shows the projected results, by products, for 2010 (in $ thousands) :

This is the third consecutive year that the tiles segment is reporting losses. The managing director is considering dropping the product line as it would mean saving $45,000 by dismissing the line's supervisor and also eliminating depreciation.
a). Do you agree that the tiles division should be closed based on the above information?
b). What qualitative factors would need to be considered before a decision on whether to keep or drop a product is adopted?
c). The marketing manager suggested that if the tile product is dropped, sales and variable costs of blocks would reduce by 10%, and sales and variable costs of bricks by 8% since customers tend to buy all three products together. Hence if the tile product is dropped, customers will buy blocks and bricks elsewhere. Does this mean it is better to keep the tile product line?

Transcribed Image Text:

BLOCKS (000) S500 250 250 TILES RICKS 000) 800 80 20 OTAL 000) 150 1450 70 80 ales revenu ess: Variable expenses ontribution marginn ess direct fixed expenses dvertising alaries epreciation 140 10 10 37 53 10 10 35 10 30 112 103 100 S 150 45 otal direct expenses RODUCT margin ess: common fixed expenses 230 35 125 erating income 210