The Essentials of Finance and Accounting for Nonfinancial Managers by Edward Fields

Author:Edward Fields [Fields, Edward]
Language: eng
Format: epub, pdf
ISBN: 9780814436950
Publisher: AMACOM

It Overstates Savings From Eliminating “Marginal ” Products

A company should never eliminate products from its mix except in the following situations:

The product achieves a negative contribution margin, and there is no opportunity to correct the situation.

The product is a quality disaster that will impair marketplace perceptions of the entire business.

The company is near capacity and needs the space, people, and machine time for more profitable offerings.

Eliminating a product that has a positive cash flow results in the loss of that cash flow. Why is there confusion about this? Because our accounting systems tell us that eliminating a product will save the variable labor costs and the corresponding overhead assigned to the product. Labor costs, as anyone who has ever managed an operation will tell you, are more fixed than variable. They will not be reduced appreciably, if at all, when volume declines. And overhead will not be reduced because the building does not get smaller, nor do the staff departments (including accounting).

If overhead spending is too high, then appropriate actions should be taken on their own merits. But to assume that all costs will decline because a product is eliminated is too simplistic and usually not true.

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