Question

Discontinue a product or segment

French Hyros (pronounced Hero’s) is chain or fast food restaurant specializing in gyros with a French flavor profile. The three following are the most popular gyros sold. Below is an average store for one year.

                                                    Bellanger                     Depardieu                   Zidane                Total

Sales                                       $720,000                     $2,330,000                  $950,000         $4,000,000

Cost of gyros

    Variable                               $520,000                     $1,200,000                  $360,000         $2,080,000

    Fixed                                   $120,000                        $140,000                  $160,000            $420,000     

Total COGS                            $640,000                      $1,340,000                 $520,000         $2,500,000

Gross Margin                           $80,000                        $990,000                   $430,000         $1,500,000

Expenses

    Variable                               $80,000                         $90,000                     $30,000             $200,000

    Fixed                                   $75,000                       $150,000                    $50,000              $275,000   

Total Expenses                       $155,000                     $240,000                     $80,000             $475,000

Income from operations         -$75,000                       $750,000                     $350,000         $1,025,000

Since the Bellanger gyro is losing money should French Hyros discontinue the Bellanger?

Write an essay discussing why the Bellanger should or shouldn't be discontinued. What other factors besides profitability should be considered? What would you do as a decision maker at French Hyros?

Answer 1

Analysis on the basis of relevant costs:

Sales	$720,000
Less: Variable Costs
Cost of Gyros	520,000
Variable Expenses	80,000
Total Variable Expenses	600,000
Contribution Margin	$120,000

Since, Bellanger is giving positive contribution margin, it should not be discontinued.

Note: Fixed Costs will continue to occur whether Bellanger is produced or not, hence not relevant for the decision.

Other factors besides profitability are:

1.Market Image of the Company

2.Morale of Employees

3.Relations with Suppliers

I will not discontinue Bellanger as a decision maker at French Hyros.