Question

Your company, Apollo, operates in the manufacturing industry, with a market leading product called Rover.

This product currently brings in a quarter of the organisation’s revenue and is responsible for a third of the company’s expenditure.

A new company has come onto the scene with an innovative product that will dominate the market and result in the loss of all Sales of Rover.

The company’s total revenue is $1,200,000
The company’s total expenses are $1,000,000

What impact will the loss of Rover’s sales have on Apollo’s revenue forecast, expense budget, and bottom line? (100-120 words)

Answer 1

Already there is a loss for product R.

Current profit = Current sales – Current expenses

                        = (1,200,000 × (1/4)) – (1,000,000 × (1/3))

                        = 300,000 – 333,000

                        = -33,000

Since the profit is negative, it means a loss.

Impact:

Revenue forecast: Forecasted revenue in future will be dropped, since R will be discontinued. A product should not be continued in future which has a loss currently and expected of having more loss in future – the new product will take the market, means the current product will be outdated.

Expense budget: The budget for expense will be dropped, since R’s expenses will be no more. Once the product is discontinued, all related expenses should not be considered.

Bottom line: Such discontinuation should increase total profit of the company, since the amount of loss which may be treated as an expense can’t reduce the overall revenue earnings in future. A loss making product must be withdraw for saving other products’ revenue.