Question

The manager of the manufacturing department is trying to decide if a plant 100 miles from corporate headquarters should continue to operate or shut down resulting in the discontinuance of a product line.

a) Identify two pieces of financial information and two pieces of nonfinancial information that would be relevant in making this decision.

b) What are two pieces of irrelevant financial information?

Answer 1

Two pieces of financial information that would be relevant in making this decision:-

1.Loss-making segments of a business such as products, customers, and locations can be a significant drain on the resources of an organization.

2.Certain products are not profitable on their own, but they may help generate sales for other products that are more profitable.

Two pieces of non- financial information that would be relevant in making this decision:-

1.Relationship with suppliers may suffer if a product line is dropped, causing loss of goodwill.

2.Discontinuing a product line may cause an adverse reaction from customers (e.g., discontinuation of spare parts).

Two pieces of irrelevant financial information :-

1. Historical cost of the plant or the equipment.

2.Sunk Cost like initial installation expenses of the machinery pay no role in decision making.