The better choice is to go with the wiggler as that

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Unformatted text preview: ution on the Buzzer is $180,000 (600,000 X 30%). The better choice is to go with the Wiggler, as that option maximizes the total contribution margin. This important distinction gives consideration to the fact that producing a few units (with a high per-unit contribution margin) may be less profitable than producing many units (with a low per-unit contribution margin). Contribution margin analysis should never be divorced from consideration of factors that limit its generation! The goal will be to optimize the total contribution margin, not the per unit contribution margin. 2.8 Discontinuing a Product, Department, or Project One of the more difficult decisions management must make is when to abandon a business unit that is performing poorly. Such decisions can have far reaching effects on the company, shareholder perceptions about management, employees, and suppliers. The tools of Enterprise Performance Evaluation chapter provided insight into performance evaluation methods that are helpful in identifying lagging sectors, and the preceding chapter showed how misuse of absorption costing information can invoke a series of successive product discontinuation decisions that bring about a downward business spiral. So, what analytical methods should be employed to support a final decision to pull the plug on a business unit? Management should not merely conclude that any unit generating a net loss is to be eliminated! This is an all too common error made by those who lack sufficient accounting knowledge to look beyond the bottom line. Sometimes, eliminating a unit with a loss can reduce overall performance. Consider that some fixed costs identified with a discontinued unit may continue and must be absorbed by other units. This creates a potential domino effect where each falling unit pushes down the next. Instead, the appropriate analysis is to compare company wide net income “with” and “without” the unit targeted for elimination. Casa de Deportes is a mega sporting goods store occup...
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