Start with contribution, not the final verdict
Prepare the decision boundary
- Reconcile product revenue, variable cost, unit contribution and volume. (not complete)
- Use one period and one consistent indirect-tax and currency basis. (not complete)
- Trace direct fixed costs to evidence that they would actually disappear. (not complete)
- Separate allocated shared costs from avoidable savings. (not complete)
- Describe the best available use of released capacity, inventory and cash. (not complete)
Separate relevant revenue and avoidable cost
change in whole-business profit = avoidable costs saved - contribution lost
- avoidable costs saved
- Direct fixed or other costs that would actually disappear because of the decision (currency units per period) — business record and decision evidence
- contribution lost
- Revenue forgone less variable costs no longer incurred (currency units per period) — business record or user scenario
Add the contribution from the best alternative capacity use separately. Do not count allocated shared cost as a saving unless it would actually be avoided.
| Cost type | Decision treatment | Evidence question |
|---|---|---|
| Variable product cost | Usually avoided with the related sales volume | Does it move directly with this product’s units? |
| Direct fixed cost | Count only the amount that actually disappears | Can the commitment be cancelled or redeployed, and when? |
| Allocated shared cost | Assume it remains unless evidence shows otherwise | Would the whole-business cash or cost commitment change? |
| Released capacity | Value through a separately modelled alternative | What feasible contribution replaces the discontinued product? |
| Inventory and working capital | Model timing, recovery and write-down separately | What cash is released, when, and at what loss or handling cost? |
Model replacement and qualitative effects
- Measure capacity, stock, working capital and management attention that would be released.
- Define the best feasible alternative use rather than assuming capacity has value automatically.
- Estimate replacement contribution on the same period and cost boundary.
- Check whether the product drives traffic, bundles, repeat purchases or demand for other products.
- Review supplier, service, customer, team and operational effects.
- Identify contractual, employee, customer and regulatory obligations for qualified review.
Worked scenario: an allocated loss that is not avoidable
All amounts are generic user assumptions for one period. No replacement contribution or qualitative effect is included yet.
| Line | Reported product view | Effect if discontinued |
|---|---|---|
| Product contribution | 12,000 | 12,000 lost |
| Allocated fixed cost | 20,000 | Not automatically saved |
| Reported allocated product result | -8,000 | Not the decision effect |
| Fixed cost actually avoidable | 4,000 | 4,000 saved |
| Whole-business profit change before replacement | — | -8,000 |
The product appears to lose 8,000 after 20,000 of allocated fixed cost. But only 4,000 would disappear. Applying 4,000 avoidable savings - 12,000 lost contribution gives a negative 8,000 change in whole-business profit before considering another use of capacity.
Compare keep, improve, pause and discontinue
| Path | Economics to model | Operational test | Stop point |
|---|---|---|---|
| Keep | Current contribution and unavoidable commitments | Capacity, service and cross-product role remain acceptable | Contribution or obligations make the current path infeasible |
| Improve or reprice | Price, cost, mix, scope or process change | Change can be delivered and measured | Assumed saving, price or demand lacks support |
| Pause | Temporary avoided cost and restart cost | Inventory, customer and supplier effects are manageable | A pause breaches obligations or destroys needed capability |
| Discontinue | Lost contribution, avoidable savings and replacement contribution | Exit, inventory, customer and team plan is workable | Whole-business scenario is not stronger or obligations are unresolved |
Before recording a decision
- Revenue, contribution and avoidable costs reconcile to one period. (not complete)
- Allocated shared costs are excluded from savings unless supported. (not complete)
- The best feasible replacement use is modelled separately. (not complete)
- Cross-product and qualitative effects are documented. (not complete)
- Contract, employee, customer and other obligations are understood. (not complete)
- Decision owner, implementation path and review trigger are recorded. (not complete)
Keep-or-discontinue questions
- Should a product with negative allocated profit always be discontinued?
- No. Compare contribution lost with costs that truly disappear, then add the feasible alternative use of capacity and qualitative effects. Allocated common costs may remain.
- Does a low-margin product automatically fail the test?
- No. Margin is only one screen. Total contribution, capacity use, avoidable commitments, cross-sales, strategic role and operational burden can all affect the decision.
- Can Product Mix Profit tell me which product to stop selling?
- No. It helps reconcile product contribution and volume-mix scenarios. The final decision also needs avoidable fixed costs, replacement use, obligations and qualitative effects that the tool does not model.
Methods used
- Identify Relevant Information for Decision-Making — OpenStax: Relevant revenue and avoidable-cost decision framework.
- Evaluate Whether to Keep or Discontinue a Segment or Product — OpenStax: Allocated common-cost, qualitative and cross-product decision boundaries.
- Product Mix Profit methodology — Margin101: Product-row contribution and mix calculation used only as the first screen.