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Keep or drop a segment product division: how to decide?

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Based on the product margin, when is it in the best interests of an organization to continue or drop a service?

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The strategy to use is given and applied to a situation to help you grasp.

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You should discontinue a product or service if the sales do not cover the variable costs and avoidable fixed costs of that product or service. If the sales exceed the variable costs and the avoidable fixed costs, then the product or service is contributing to the common or allocated fixed costs and should be retained. Discontinuing a product or service that has sales in excess of variable costs and avoidable fixed costs will reduce total profits.

For instance, look at this segment: (see attached for better formatting)

Amarillo
Sales ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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