QUESTION 1

Gold Sdn. Bhd. offers three products for the construction industry: blocks, bricks and tiles. The

following income statement shows the projected results, by products, for 2017 (in RM thousands):

Blocks ('000)

Bricks ('000)

Tiles ('000)

Total ('000)

Sales revenue

RM500

RM800

RM150

RM1450

Less: Variable expenses

250

480

140

870

Contribution margin

250

320

10

580

Less direct fixed expenses:

Advertising

10

10

10

30

Salaries

37

40

35

112

Depreciation

53

40

10

103

Total direct expenses

100

90

55

245

Product margin

RM150

RM230

RM(45)

RM335

Less: common fixed expenses

125

Operating income

RM210

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 RM45,000 by dismissing the line's

supervisor and eliminating depreciation.

a) Should the tiles division be closed based on the above information? Show your analysis of data.

b) Discuss 3 qualitative factors that 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?