Question

Many fast food restaurant chains, such as McDonald's, will occastionally discontinue restaurants in their system. What are some financial considerations in deciding to eliminate a store?

Answer 1

1. Does the segment have a positive contribution margin?

if a product cover all the variable manufacturing cost and contribute some towards the fixed cost than its a positive contribution margin. If its impossible than store have to eliminate.

2.Can any of the fixed costs be avoided if the segment was discontinued?

There are two types of fixed costs that should be considered, direct fixed costs and common fixed costs.

Direct fixed costs are fixed costs that can be directly traced to the segment. Just because a fixed cost is direct does not mean that it is avoidable. There may be depreciation, contractual obligations, and other costs that the company will not be able to cut even if the segment is discontinued. If the fixed costs cannot be avoided, losses will increase if the segment is discontinued because the segment will no longer be contributing to the total contribution margin.

Common fixed costs are organization sustaining fixed costs that are allocated to the segment. These fixed costs will continue even if the segment has been eliminated; they will just be allocated to the remaining segments.

3. Can the freed up capacity be used for another purpose?

If the store is eliminated could the company use the machinery and employees for another purpose? Could the company make additional units of another product or make a new product?if there is something more profitable it could do instead

Costs

cost on which a store provide service and products to the customers but store can't have recover that cost on that a customer need products.

Customers

Know what store customers want from store products and services. Are they driven by the cheapest price or by the value they receive? What part does price play in their purchase decision?

Positioning

Once store understand your customer, you need to look at store positioning

Competitors

There is compedition in every type of business than if other same products provided at lowerest cost but a store may not manufacture his product on that cost than how they provide to its customers