A branch office or business segment that shows negative operating income should be shut down.” Do...

A branch office or business segment that shows negative operating income should be shut down.” Do you agree?

Expert Solution

No .

A branch office or business segment that shows negative operating income may be shutdown or may not be shutdown. Decision will be based on cost analysis. Just because operating result is negative shut down may not be correct decision without further analysis and shutdown may reduce the overall profitability of the company. Decision should be based on contribution analysis.When a company can earn a positive contribution margin, it should remain in operations despite an overall marginal loss.Shutdown points are based entirely on determining at what point the marginal costs associated with operation exceed the revenue being generated by those operations.

For example, if the revenues that will be lost exceed the costs that will be saved, the branch or business segment should not be shut down. Shutting down will only increase the loss. Allocated costs and fixed costs that will not be saved are irrelevant to the shut-down decision.

ekkarill92 answered 1 year ago

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