Question

Cost accountants find that one-third of the company's products are not profitable, looks like they have to discontinue those non-profitable products to improve the overall company profit. Do you agree, yes or no and why?

Answer 1

No,The cost accountant suggestion should not be accepted immediately.

Explanation-

The company has 1/3 of its products non profitable which means company is not performing well enough to cope with the existing business environment.Because to have 1/3 of it's product non profitable, it may not be based solely on costing concepts some strategic failures must be considered.

As far as costing is concerned,these concepts also deny any sudden closure of any product,before closure of a particular product's unit the company must evaluate its impacts on different remaining product sales volume and existing current fixed cost.

It may be possible that closure of product A will lead to lower demand of product B from the same company.Other factor may be that fixed cost may not be reduced even is such unprofitable unit is closed,because it might carry some unavoidable cost.

Let me share you a example of one company,which my boss faced in real life,

My boss has a client,who used to take the strategic consultation from my boss on time to time basis.Such client had a business of spices.He faced some thought competition where his produce red chilly was targeted by his competitors,the client decided to communicate with my boss.

They had a long conversation where such company's director had opinion to discontinue the existing red chilly product and to focus on remaining spices like turmeric and Garam masala (a mix of several high efficiency spices).My boss said him to continue to with the existing product I.e chilli powder.

They had reason to say this because in most of the Indian families you would see using red chillies but some of them uses garam masala,which means the director had a competition of its main product in the market.

In this case scenario my boss suggested him to compete the competitors at reduced price and make some margin on its favorable produces like garam masala.My boss had reason to say that because of level of demand that such company would not have been survived only on Garam masala since it had lowest of demand in general.

Hence several aspect like this must be considered before discontinuing any product.

Please comment for any additional explanation.

Thanks