What are the factors to be considered before making a shutdown decision?

What are the factors to be considered before making a shutdown decision?

The following factors must be taken into account when considering shutdown problems.

  • Strategic fit. Does the location, product, or customer have any strategic significance to the business that outweighs any short-term losses?
  • Customer relations.
  • Supplier relations.
  • Employee relations.
  • Loss leader.
  • Timing of shutdown.

What factors should be considered when making decision on eliminating loss making segment of a company?

When deciding if a company should drop an unprofitable segment, the company should create a segment contribution margin income statement. If the contribution margin is positive, the company should consider direct and common fixed costs, what to do with freed capacity, and the effect on sales of other products.

When deciding whether to discontinue a segment of a business managers should focus on?

Question: When deciding whether to discontinue a segment of a business, managers should focus on: Multiple Choice The cost of equipment from the segment that could go idle if the segment were discontinued. The amount of operating income per unit produced by the segment.

What information should a firm take into consideration when making a decision on whether to add or drop a product line?

When deciding to add a new product line or drop an existing one, the management must consider relevant benefits and costs. Add or drop decisions require the computation of segment income. Segment income excludes allocated fixed costs, since these are not traceable to the segment and are unavoidable.

At which price will a firm shut down?

Looking at Table 8.6, if the price falls below $2.05, the minimum average variable cost, the firm must shut down. The intersection of the average variable cost curve and the marginal cost curve, which shows the price where the firm would lack enough revenue to cover its variable costs, is called the shutdown point.

Why are MC curves significant for a firm?

For a firm operating under perfect competition, its marginal cost curve becomes its supply curve. The marginal cost curve, because it measures the incremental opportunity cost of producing one more unit of a good plays, an important role in analyzing the efficient allocation of resources.

Which of the following costs are always irrelevant in decision making?

Sunk costs are those costs that happened and there is not one thing we can do about it. These costs are never relevant in our decision making process because they already happened. These costs are never a differential cost, meaning, they are always irrelevant.

What is the rule for whether to sell or process materials further?

The decision rule for whether to sell or process materials further is: Process further as long as the incremental revenue from processing exceeds the incremental processing costs.

When making a decision irrelevant items are included?

When making a decision, irrelevant items are included in the analysis in both alternatives when using: the total cost approach only.

What is the shutdown rule?

The shutdown rule states that “in the short run a firm should continue to operate if price exceeds average variable costs. ” When determining whether to shutdown a firm has to compare the total revenue to the total variable costs.

How to determine whether to keep or discontinue?

Management should also consider qualitative factors, such as the impact of removing one product line on the overall sales of the other products. If customers commonly buy snow boots and skis together, then discontinuing the snow boot line could impact the sales of snow skis.

When to discontinue a product in a company?

The loss is larger now than it was when the company was making Product A. The negative impact on sales of Product B outweighs the savings from discontinuing Product A. Make sure to look at the adverse effects on other segments of the company before deciding to drop a segment.

How to decide to keep or drop a part of a company?

When deciding to keep or drop a part of the company, the first thing to do is to create an income statement broken into segments. For example, if a product is unprofitable, create a product line income statement. If there is a location that is not profitable, create an income statement for that location.

When to keep or drop products, departments and locations?

Keep or Drop: Discontinuing products, departments, and locations. Sometimes when a business sees that a product, department, or location is losing money, the first reaction is to shut it down. Discontinuing operations is a decision that should only be taken after careful consideration and number crunching.

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