Yale case book wrong answer - would like to confirm

Anonymous A asked on Sep 06, 2017

Hi, There is a case on Yale case book, the answer says: "Our client will save $6,000/year in costs and suffer a maximum reduction of $1,500/year in profits. This is a net gain of $4,500/year". Just want to clarify this statement is wrong. The net gain should be 1500/year, not 4500/year.

Thanks

Freda

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Anonymous B replied on Sep 06, 2017

Hi Freda,

I disagree with your interpretation.

Look at both components individually:

If you save $6000 in costs, your net gain is $6k.

If you lose $1.5k in profits, your net loss is $1.5k.

Add both numbers and find the answer to be correct.

Best
Björn

Thank you! — Freda on Sep 06, 2017

Hi, thank you for this answer! I am actually also struggling to understand the solution of this case, and why the company would experience a "net gain" by shutting down one product segment that has a profit of $1,500/year and a cost of $6,000/year. When does it make sense to stop one product segment to reduce costs, when this specific product is still profitable? I guess it depends on the profit margin of the other products; any thoughts on that? — Marie-Eve on Sep 26, 2017 (edited)