Should You Stop Selling an Unprofitable Product?

This guide helps an owner whose product report shows a loss after overhead allocations. The profit and loss guide explains the report; this worksheet tests what changes if that product disappears.

Start with the product's contribution

Separate sales, variable costs, fixed costs dedicated to the product and shared costs allocated to it. ACCA's relevant-cost guidance distinguishes future changes from costs that remain. An allocation disappearing from one report does not mean the business stops paying the bill.

Assumptions: Fictional Australian-dollar management example. Revenue and costs exclude any recoverable GST; non-recoverable tax is included in costs. No GST entitlement or income-tax deduction is assumed for your business. Contribution is before unallocated overhead and income tax. Dedicated costs are assumed fully avoidable immediately. Other products and their revenue remain unchanged in the base case.

Monthly item	Keep product	Drop product
Sales	$10,000	$0
Variable costs	−$6,000	$0
Contribution	$4,000	$0
Dedicated avoidable fixed costs	−$1,500	$0
Shared overhead that remains	−$3,000	−$3,000
Result for these same costs	−$500	−$3,000

Original ASBG worked example. All businesses, amounts and scenarios are fictional. The table contains the same figures as the visual.

The product appears to lose $500. Dropping it saves $1,500 dedicated fixed cost but loses $4,000 contribution, making the business $2,500 worse off per month. The $3,000 shared overhead is still payable and will appear elsewhere in the accounts.

Withdrawal would need benefits greater than the $2,500 lost support for shared costs, or a way to reduce the costs that remain.

Cost a real replacement use

If withdrawing the product releases capacity for confirmed work contributing $3,200 a month after every additional cost, the combined change improves profit by $700: $3,200 − $2,500. If there are no replacement orders, leave that benefit at zero. Use the constrained-capacity worksheet where a particular machine or specialist is involved.

Check linked sales too. A low-margin accessory may accompany other purchases, but do not assume all those purchases would disappear. Compare actual baskets, customer enquiries or a limited trial to estimate the effect. Avoid adding the same replacement contribution under both capacity and linked sales.

Plan the exit costs and dates

List unsold stock, expected disposal receipts, supplier orders already committed, support obligations and the date each dedicated cost can stop. A paid annual subscription might remain for months even if the product is withdrawn tomorrow. Obtain advice on actual commitments rather than assuming they can be cancelled.

Write a transition-month forecast as well as the steady monthly result. If stock clearance brings $2,000 once, it does not replace $2,500 of lost contribution every month. Keep disposal receipts separate from recurring benefits and test any discount needed to sell the stock.

Consider changing the offer before withdrawing it

Repricing, a smaller range or a different supply method may preserve contribution with less complexity. The make-or-buy comparison tests supply costs. If service and administration are causing the loss, use the customer cost-to-serve worksheet to see which activities could change.

Where to get help

Take both scenarios and the dates of avoidable costs to your accountant. Discuss customer and supplier obligations with the appropriate adviser before ending an offer. The pricing and profit hub connects the next investigations.