| |
Dropping a Segment
If in the above example a decision to drop one of
the products is being considered the contribution (sales revenue less
variable costs) from that product would be lost, while the shared fixed
overheads would remain the same in the short-term. For instance, if
product B were dropped in the above example the sales and variable costs
for B (i.e. B's contribution) would be lost, but the fixed costs would
remain the same, so the profit would be reduced by the amount of the
lost contribution from B (£16,150 - £8,100 = £8,050).
|
|
Note, however, that a consequence
of this analysis in practice would be to avoid dropping an unprofitable
segment unless an alternative use for the productive capacity represented
by the fixed costs (i.e. a new product or expanded production of an existing
product) which yielded a greater contribution could be substituted. Alternatively,
there might be a deliberate attempt to reduce capacity and associated
fixed costs over the medium-term.
|
|
