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ACCA Strategic Professional · Strategic Business Leader · Cost and management accounting

Delta Foods allocates its single plant's fixed overheads to products on a per-unit basis. Management is considering dropping Product P, which has a positive contribution but a negative profit after absorbed fixed overheads. No fixed costs can be avoided by dropping P. What does cost behaviour analysis imply?

Delta should retain Product P. It makes a positive contribution, and since no fixed costs are avoidable, dropping it would remove that contribution while the same fixed costs are simply spread across the remaining products, reducing overall profit.

  1. ARetain P, because dropping it would lose its contribution while the fixed costs remain and are reallocated to other productsCorrect
  2. BDrop P, because it reports a loss after absorption of fixed overheads
  3. CDrop P, because variable cost behaviour implies that fixed costs fall in proportion
  4. DRetain P only if its selling price exceeds total absorbed cost

Explanation

If no fixed costs are avoidable, the company's profit falls by P's contribution when P is dropped. The reported loss arises from arbitrary allocation, not from cash flows. Option B relies on the allocated figure, which is not relevant.

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