enterprises often encounter the decision-making problem of whether products should be stopped. Usually, managers think that long-term loss-making products of enterprises should stop production or change production. There are many reasons for the loss of products, or the quality is inferior and the style is outdated; Or the market is oversupplied and lacks sales; Or the cost is too high, lacking competitiveness, and so on.
decisions are divided into two categories according to their losses: one is products with real losses, that is, the sales revenue is lower than the variable cost, and the contribution margin is negative; The more this product is produced, the more it will lose, and the production must be stopped; However, if it is a product of the national economy and people's livelihood, it should be produced from a macro perspective, even if it loses money. The other kind is the virtual loss product, that is, the sales revenue is higher than the variable cost, which can provide the contribution margin, and this product still contributes to the enterprise. In short, the loss-making products should be made according to different situations.
1. The relative surplus production capacity cannot be transferred
In this case, as long as the loss-making products meet any of the following conditions, they should not stop production:
The unit variable cost is greater than the unit price;
unit contribution margin is greater than zero;
the sales revenue is greater than the variable cost;
the total contribution margin is greater than zero;
the contribution marginal rate is greater than zero;
the variable cost rate is less than 1.
2. Relative surplus production capacity can be transferred
As long as the contribution margin of the loss-making product is greater than the opportunity cost related to the transfer of relative surplus production capacity, production should not be stopped; Otherwise, production should be stopped.
in short, from the perspective of financial decision-making, we cannot generalize. As long as the loss-making products still have a market, even if the sales price is lower than the unit product cost, but higher than the variable cost, it can provide a certain marginal contribution, and the loss-making products can continue to produce. Because loss-making products also bear the fixed costs of enterprises. If the loss-making products stop production, then this part of the fixed expenses originally borne by the loss-making products will be borne by the profit-making products, which will inevitably increase the cost of the profit-making products, thus reducing the profits of enterprises.