What is Product Line Elimination Analysis?
Product line elimination analysis is a managerial accounting technique used to decide whether to discontinue an unprofitable product line, department, or segment. It compares the contribution margin a line generates against the fixed costs that would actually disappear (avoidable fixed costs) if the line were dropped.
A product line should generally be eliminated only if its contribution margin is smaller than the avoidable fixed costs it carries — meaning the company would be better off financially without it.
- •Segment margin is positive
- •Covers its own avoidable fixed costs
- •May have synergies with other products
- •Retains market presence
- •Segment margin is negative
- •Avoidable fixed costs exceed contribution
- •Common (unavoidable) costs remain and get reallocated
- •Frees resources for other lines
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Step-by-step worked examples
Product line A has sales of $200,000, variable costs of $120,000, and avoidable fixed costs of $50,000. Should it be kept?
Contribution margin = 200,000 − 120,000 = 80,000 Segment margin = 80,000 − 50,000 = 30,000 Segment margin is positive ($30,000), so keep the line.
Product line B has sales of $150,000, variable costs of $110,000, and avoidable fixed costs of $60,000. Should it be kept?
Contribution margin = 150,000 − 110,000 = 40,000 Segment margin = 40,000 − 60,000 = −20,000 Segment margin is negative, so the line is a candidate for elimination — it loses $20,000.
Product line C has sales of $90,000, variable costs of $50,000, and avoidable fixed costs of $30,000. Should it be kept?
Contribution margin = 90,000 − 50,000 = 40,000 Segment margin = 40,000 − 30,000 = 10,000 Positive segment margin ($10,000) — keep the line.
Flashcards
Quick quiz
Q1.Sales $300,000, variable costs $180,000, avoidable fixed costs $70,000. What is the segment margin?
Q2.Sales $100,000, variable costs $80,000, avoidable fixed costs $30,000. What is the segment margin?
Q3.Based on Q2's negative segment margin, what should management consider?
Q4.What happens to unavoidable common fixed costs after a product line is eliminated?
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Common mistakes
Allocating unavoidable common fixed costs to the line and treating them as avoidable. — Correct: Only avoidable (traceable) fixed costs that vanish if the line is dropped belong in the segment margin calculation.
Eliminating any line with an accounting loss after full-cost allocation. — Correct: Base the decision on segment margin using avoidable costs only, not fully allocated costs.
Ignoring qualitative effects like complementary sales or customer relationships. — Correct: Consider strategic effects — dropping one line can hurt sales of related products.
Assuming total company profit rises by the exact loss amount after elimination. — Correct: Company profit may rise less (or even fall) because unavoidable costs remain and get spread elsewhere.
FAQ
What is product line elimination analysis?
It's a managerial accounting method for deciding whether to discontinue a product line by comparing its segment margin to its avoidable fixed costs.
What is the product line elimination formula?
Segment margin = (Sales − Variable costs) − Avoidable fixed costs. A negative result signals a candidate for elimination.
What are examples of product line elimination decisions?
A retailer discontinuing a slow-selling product category that fails to cover its avoidable rent and staffing costs is a common example.
How do you calculate product line elimination?
Subtract variable costs from sales to get contribution margin, then subtract avoidable fixed costs; a negative segment margin suggests elimination.