Question

what data do managers need to gather and what important analysis completed before the decision of dropping or keeping a branch

Answer 1

The decision to keep or drop a branch involves relevant cost analysis

The managers need to gather the following relevant data relating to branch

· Sales revenue for branch to be dropped and impact on other branch sales.

· Variable cost – variable cost of goods sold and variable selling and administrative expenses

· Avoidable fixed cost for example: branch specific costs like rent, employee’s salary, which excludes allocated and common cost.

The analysis of whether to continue or drop a branch involves following things:

If the Contribution margin (Sales – Variable cost) is greater than the avoidable fixed cost the branch should be continued. If the contribution margin is lower than the avoidable fixed cost the branch should be dropped.

Note: The unavoidable fixed cost is not relevant in analysis. It is irrelevant cost in decision making whether to keep a branch or drop it.