Principles of Managerial Accounting · free preview
Keep-or-Drop Decisions for Segments and Products
A segment or product should be kept while its contribution margin exceeds its avoidable fixed costs, and dropping it otherwise, with allocated common costs excluded because they continue regardless of the decision.
1. The segment margin test
The segment margin test
2. A worked example
A worked example
3. The complicating ripples
The complicating ripples
4. The fix-or-drop alternative
The fix-or-drop alternative
5. Segment margin formula
Segment margin equals which combination?
6. Segment margin computation
A segment earns 200,000 dollars of revenue, incurs 150,000 dollars of variable costs, and carries 65,000 dollars of traceable fixed costs. Compute segment margin.
7. Allocated overhead treatment
Why are allocated common costs excluded from keep-or-drop analysis?
8. Drop decision profit effect
Dropping a segment removes 50,000 dollars of contribution margin and saves 65,000 dollars of traceable fixed costs. Compute the effect on company profit.
9. Common cost synonym
Costs shared across segments that continue regardless of a drop decision are called ____ costs. One word.
10. Fix-or-drop trigger
A slightly negative segment margin invites a ____-or-drop analysis of price and cost improvements before exiting. One word.
Practice this interactively
Free account · instant grading · spaced review that schedules itself.
Start this course for free