FM 225 – Management Accounting

Case 2: SHORT-RUN DECISION

Consider Norton Materials Inc., which produce concrete blocks, bricks and roofing tile.

The controller has required the following estimated segment for next year

(in thousands of dollar):

(In Dollars) Blocks Bricks Tile Total
Sales Revenue 500 800 150 1,450
Less: Variable expenses 250 480 140 870
Contribution Margin 250 320 10 580
Less: Direct Expenses
Advertising 10 10 10 30
Salaries 37 40 35 112
Depreciation 53 40 10 103
Segment Margin 150 230 -45 335

The project performance of the roofing tile line shows a negative segment margin. This occurrence
would be the third consecutive year of poor performance of that line. The president of Norton materials,
tom Blackburn-concerned about this poor performance- is trying to decide whether to keep or drop the
roofing tile line.

Should the roofing tile line be kept or dropped? Compute the net advantage to keep or drop the product
line.