What decision rule should be followed when deciding if a business segment should be eliminated?

The segments whose revenue is less than the avoidable expense of the organization must be eliminated when the management considers the elimination of a business segment.

Explanation:

The segments contributing less than the avoidable expense of the organization are deemed to contribute negatively to the organization. Hence the organization must consider eliminating such segments in order to ensure the sustainability and growth of all the segments and organization collectively.

Further explanation:

Avoidable expenses of an organization are those expenses which generally occur only with the continuity of that particular activity. Thus, the discontinued practice of such an activity will result to end of such expenses. Such an expense includes – cost on direct labour, directly attached marketing costs, etc.

Hence the segments which yield less than the avoidable cost of the organization must be considered for the elimination as they give inadequate returns and are unprofitable for the organization.

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Keywords:

Elimination of a segment, less revenue making segments, avoidable cost in elimination of segment, avoidable expense.

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