Rex Santos, a cost accountant, prepares a product profitability report for Jane Gates, the production manager. Much to Rex’s surprise, almost one-third of the company’s products are not profitable. He says, “Jane, it looks like we will have to drop one-third of our products to improve overall company profits. It’s a good thing we decide to look at profitability by product. :Do you think Jane will agree with this approach? Why?
To the above question below is the answer:
Reason to agree with approach: If the products are not contribution to company profits, then the products should be eliminated. This will increase overall company profits.
Reason not to agree with approach: the reported product costs and the associated product profits depend on the allocation of indirect costs. Under a different allocation process, the results cold be very different. In addition many of the indirect costs are unavoidable. If the products are eliminated, the costs will be allocated to the remaining products.
Question: assuming the above statement can we cut out fixed costs by 1/3 also? I think that eliminating the fixed costs by 1/3 or decreasing the hours of operation for the business will increase the opportunity to allocated profitable.
is that normally possible at a business? Just cut your fixed costs that dramatically?