KEEP OR DROP A PRODUCT LINE INCREMENTA L ANALYSIS
Hard Rock Company currently offers several lines of decorative stone. It takes the larger rocks and splits them down into smaller pieces that it then sells by the pound in both bags and in bulk quantities. Recently, there has been a 25% increase in the cost of granite as more people put in granite countertops. Bob Neely, owner of Hard Rock, is considering dropping the granite line. Most people who buy bags of the rock only buy one type, so there should be no problem with this element of the product line. But bulk purchasers often need multiple types of stone and will go w here they can get all of their stone in one stop. Bob estimates he will lose 20% of bulk sales if he drops the granite line.
If Hard Rock stops making granite stones, it will save the raw materials cost, packaging for bags, and the labor used for the bags. It will not get rid of any machines, however, as it still needs its productive capacity for other products. Any unused capacity of the machine will have to be added to overhead. It also will not be able to get rid of any overhead. The total prices and costs for the various products currently sold by Hard Rock are in the table below.
a. Calculate the total revenues, costs, and profits under the current operating conditions. How much money does the company currently make in total?
b. Now drop the granite line and recalculate all of your revenues, costs, and profits. What is total profit now? Be careful here. Remember bulk sales of other products will drop by 20%, but bag sales will be unaffected.
c. Finally, calculate all of the revenues, costs, and profits if you keep the granite line and absorb the cost increases.
d. Which alternative looks the best to Hard Rock? Why?