Question

Profits for one of Company X’s flagship products have been declining slowly for several years. The CFO investigated and determined that inflation has raised the cost of producing the product but consumers who were surveyed reported that they weren’t willing to pay more than the current price. As a result, the CFO recommended that the company stop producing this product because the CEO only wants products whose profit margins are increasing.

The answer to which of the following questions would be most useful in evaluating whether the CFO’s decision to divest the company of its flagship product is warranted?

• A. Does the company have new and profitable products available with which to replace the flagship product?
• B. Will the rest of Company X’s management team agree with the CFO’s recommendation?
• C. Are there additional features which could be added to the product and for which consumers might be willing to pay a higher price?
• D. Is there a way to alter the manufacturing or distribution processes in order to reduce the cost to produce the flagship product?
• E. What percentage of Company X’s revenues is represented by sales of the flagship product in question?

Answer 1

The correct option is D Is there a way to alter the manufacturing or distribution processes in order to reduce the cost to produce the flagship product?

If the costs for the existing product can be reduced, then the profit margin will increase (again, recall that Profits = Revenues – Costs). If the costs cannot be reduced, then the profit margins will not increase.