Companies often allocate common fixed costs among segments. For example, common fixed corporate costs are often allocated to divisions and appear as part of the divisional performance reports.Required:What dangers are there in allocating common fixed costs to segments when involved in a decision to possibly drop a segment such as a product or a division?
What will be an ideal response?
A segment such as a product or a division may show a net loss only because of the allocated common fixed cost. However, if the segment is dropped, the common fixed expense will continue. A segment should be dropped only if its contribution margin does not cover its own avoidable fixed costs. And even in cases where a segment does not cover its own costs, it may be beneficial to retain the segment if it has positive effects on other segments. For example, a "losing" product may be important in luring customers into a store where they will buy other products.
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