Question

Imagine you’re the CFO of a company with 10 product lines and an infrastructure that includes several functional departments which support some or all of these product lines. The CEO is curious as to what effect dropping one of the product lines or increasing investment in certain product lines might have on company profits.

Based specifically on what we’ve been reading about in recent weeks, what information should the CFO be gathering and key metrics calculated to help the CEO make such decisions? What are “fixed” expenses, are they truly “fixed” and how should they be considered when making such decisions?"

Answer 1

Since the CFO of the company is curious to know the effects a business proposal to drop a product line or to invest in new product line will have on company's profit.

So it will require the CFO to gather such information which will help to analyse the effects it will have on companies profitability, liquidity as well as on companise working capital management system also, like:

1. If want to invest in new product line

• Industry analysis of the product which the company want to invest in.
• The profitability of the new product line
• Capital budgeting need to finance such product line.

2. If want to drop an existing product line

• Cost-volume-profitability analysis to understand whether the particular product line is profitable or not.
• What all are the relevant cost which can be avoided.
• Amout of sunk cost and the fixed cost which continue to be incurred even after dropping off that particular product line.
• The opportunity cost of using the resources in an alternate product line.

The CFO needs to consider the fixed expenses which are attached to that particular product line which will be incurred irrespective of level of production activity, and whether all the amount in fixed cost consist of fixed expenditure only or it is a semi-variable cost which means it's a combination of variable cost and fixed cost upto certain relevant range which cannot be avoided.