Declining Market, Inc.
Declining Market, Inc., is considering the problem of when to stop production of a particular product in its product line. Sales of the product in question have been declining and all estimates are that they will continue to decline. Capital equipment used to manufacture the product is specialized but can be readily sold as used equipment. What, if anything, is wrong with a decision rule for this case that says, “Keep producing the product as long as its contribution to net earnings is positive”? [Contribution to net earnings, where τ is the tax rate, is (1 − τ) (Sales − Variable cost − Depreciation on equipment used to manufacture product).]
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