Vogt Corporation's product no. H647 has a negative contribution margin. How can such a situation arise? Should the company continue to stock and sell product no. H647? Explain.
What will be an ideal response?
A negative contribution arises because selling price is less than variable cost. Several reasons may create this situation: (1) inefficient operations and, thus, higher costs; (2) a very competitive marketplace, which has forced the firm to lower its price; and (3) a loss leader whereby Vogt is purposely taking a loss on product no. H647 with the intent of stimulating customer demand for other, more profitable products.
Each unit sold will lower overall profitability so, technically, Morton should not continue to sell product no. H647. However, for reasons (2) and (3) above, the firm might decide otherwise and stick with this "loser."
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