Close 1 product line (save 6k cost & loss 1.5k profit) is a 4.5k net gain?

Cost reduction profitability yale casebook
New answer on Jan 04, 2020
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Hi there!

I was given the 10th case from Yale Casebook 2013, saying if we shutdown a product line (6k cost and 1.5k profit annual), we can get a net 4.5k saving.

I do not understand yet, since I thought it was a 1.5k loss - given 7.5k in rev and 6k in cost.

Does somebody have any idea on that? Thanks in advance

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Hi,
I agree with you. From the screenshot you provided on the case, it seems that it is comparing profit with variable cost. The correct consideration is comparing revenue and variable cost (i.e. the loss in profit -> 1.5k loss). Of course, you should even consider the fixed cost saved (wages, machines, utilities, part of the plant, ...), but from those data you only get 1.5k of loss as you said.

Best,
Antonello

Hey Antonello - thanks for your answering! That's also my way to compare and is different from the casebook slides, but with your endorse I feel great; for the fixed cost, yes you are definitely on the right point - the case did not mention but FC should be mentioned at least in risk part. Tks!

Hello,

you are completely right, they made a confusion between profits and revenues.
If you are talking of profits, you are already considering the difference between costs and revenues. Therefore profit is exactly what you save/lose every year.
Furthermore, you should differentiate between variable costs and fixed costs. Even if you shutdown a product, you could still have the fixed costs.

Hope it helps,
Luca

Hello!

From the data you provided in the post, agreed with you.

To me it´s also 1.5K loss.

Cheers!

(edited)

I think you are overthinking this problem and getting confused as a result. Let's imagine for a second that the cost was fixed and all that happened was we stopped selling large towels.

The 1.5k refers to the drop in profit (a loss in profit). A change in profit "keeping cost fixed" is revenue...1.5k represnts the drop in revenue.

In reality though the cost was not fixed. It actually went down by 6k because we got rid of this line.

Take together we have 6k in savings but we lost 1.5k in extra sales --> 4.5k net gain. Does this make sense?

Hey there! Thanks for answering. I drew a box with + 1.5k and - 6k. By transparenting/cross two parts I can understand the 4.5k net gain, at static. However, I still query what's the meaning of such a "net gain" in real business world... and btw how to shift one line down in type back? Tks