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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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