Keep-or-Drop Decisions

• Often, a manager needs to determine whether a

segment, such as a product line, should be kept or
dropped.
• Segmented reports prepared on a variable-costing
basis provide valuable information for these keep-or-
drop decisions.Both the segment’s contribution
margin and its segment margin are useful in
evaluating the performance of segments.
• However, while segmented reports provide useful
information for keep-or-drop decisions, relevant
costing descrdecision.ibes how the information
should be used to arrive at a
The roofing tile line has a contribution margin of $10,000 (sales of $150,000 minus total variable
costs of $140,000). All variable costs are relevant. Relevant fixed costs associated with this line
include $10,000 in advertising and $35,000 in supervision salaries. Assume that dropping the
product line reduces sales of blocks by 10 percent and sales of bricks by 8 percent.
Required:
1. If the roofing tile line is dropped, what is the contribution margin for the block line? For the
brick line?
2. Which alternative (keep or drop the roofing tile line) is now more cost effective and by how
much?
Further Processing of
Joint Products
• Joint products have common processes and costs of
production up to a split-off point. At that point, they
become distinguishable as separately identifiable
products. The point of separation is called the split-off
point.
• Sometimes it is more profitable to process a joint
product further, beyond the split-off point, prior to
selling it (sell or-process-further decision).