Question

crows ltd a manufacturing company. they produce a number of different types of products. in recent years one of their main products is incurring loss and they are considering to discontinue it. do you agree with the decision? explain what key factors they need to consider in arriving at the decision.

Answer 1

The factors that need to be considered to decide whether or not to keep a product are :

1. First of all we should check whether the product has a positive or negative contribution income . If the contribution is negative , the product should be discontinued. If it is positive , even if the contribution is not enough to cover total fixed cost , but it would reduce the loss due to fixed costs.

2. Second thing we need to consider that if any of the fixed costs could be avoided because of discontinuing the product.  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.

3. We need to check if the freed up capacity could be used for another purpose. If the same could be used for something else , and the contribution from some other activity is more , the business could consider to discontinue and replace the product.

4. Also we need to consider if discontinuing the product could have adverse affect on other products of the company. If the products are sold in combination , the discontinuation of product could have affect on sales of other product . The loss due to the same also need to be measured.

5. If the employees need to be fired after discontinuing the product , it would reduce the confidence of other employees on the company.