Eliminate an Unprofitable Segment - Eliminate an...

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Eliminate an Unprofitable Segment Management sometimes must decide whether to eliminate an unprofitable business segment. For example, in recent years many airlines have quit servicing certain cities or have cut back on the number of flights; and Goodyear recently quit producing several brands in the low-end tire market. Again, the key is to focus on the relevant costs—the data that change under the alternative courses of action . To illustrate, assume that Martina Company manufactures tennis racquets in three models: Pro, Master, and Champ. Pro and Master are profitable lines. Champ (highlighted in color in the table) operates at a loss. Condensed income statement data for the three segments are: Illustration 23-10 Segment income data It might be expected that total net income will increase by $20,000 to $240,000 if Martina Company eliminates the unprofitable Champ line of racquets. However, net income may decrease if that line is discontinued . The reason is that the other products will have to absorb the fixed expenses allocated to the Champ racquets. To illustrate, assume that the $30,000 of
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