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Module 5: Differential Analysis
Retain or Drop Product Segment Decision Case
When deciding to keep or drop a part of the company, the first
thing to do is to create an income statement broken into
segments.
For example, if a product is unprofitable, create a product line
income statement. If there is a location that is not profitable,
create an income statement for that location. Use a
contribution margin income statement to separate variable
costs from fixed costs.
Overall, the company has a loss of P4,000 because Product A has a P38,000
loss. On the surface, it might look like dropping Product A and only
producing Product B would result in a profit of P34,000. But is that correct?
