Net gains or just cost savings calculation

Question

In one case, they calculated the cost-savings from discontinuing a product (eg $6000) and then calculated the reduction in profits (from lost sales of the discontinued product eg $2000). Then they did Net gains = Cost savings - reduction in profit (I.e $4000) Do we need to do this step? Typically I always see calculations with closing down a factory or any discontinuation of service on just a cost-savings basis.

Answer 1

Hi there,

This is actually a better way to do it. Even cost-cutting questions/prompts should consider net profits.

Think about it logically: if you as a company cut costs and lose profits as a result, did you make a good decision?

That said, #1 thing you have to do is be clear on the objective. Clarify what the goal of the client is, and make sure you understand how they measure success. Every case is different!

Answer 2

Hi there,

I agree with Ian that you should clarify the goal of the case first.

If they ask which are the net savings of closing the plant, you should also consider the lost revenues that continuing the production would imply
On the other hand, if they ask which are the costs savings only of the plant, then you should calculate the costs only. However, even in this case, you should point out that the actual savings could be lower due to lost revenues

Best,

Francesco