A quantitative rule of thumb for keep-versus-drop decisions is that any fixed costs avoided by dropping a product line or closing a business segment should be larger than the contribution margin given up.
(contribution margin = revenues - variable costs)
How does differential analysis help in making decisions about maintaining or discontinuing product lines?
To decide whether to retain a customer or let them go, managers employ differential analysis. Making decisions about a product line is done in a format analogous to that used for differential analysis. While product lines are not directly linked to sales income, variable costs, or fixed costs, they are.
When deciding whether to preserve a product line or shut down a company division, a quantitative rule of thumb is that any fixed expenses saved by doing so should be greater than the contribution margin lost.
Therefore, product lines are not directly linked to sales income, variable costs, or fixed costs.
Learn more about the rule of thumb from the given link.
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