What is a keep or drop analysis?

What is a keep or drop analysis?

• A. A method to decide which products to keep or drop based on market share.
• B. An approach to allocate resources across departments.
• C. A technique to determine overall profitability ignoring segments.
• D. A decision model evaluating whether to continue or discontinue based on incremental revenues and costs.

Answer: (D)

Keep or drop analysis focuses on whether to continue a product, service, or segment by comparing the additional (incremental) revenues it would generate against the additional costs it would incur. The crucial point is to consider only costs and revenues that would change if the decision is made—sunk costs and any fixed costs that would remain regardless are not relevant. If the incremental revenues exceed the incremental costs (especially the avoidable costs), keeping it adds value; if not, discontinuing it is the better choice. This is exactly a decision model that weighs continuing versus discontinuing based on incremental cash flows. It isn’t about market share, broad resource allocation, or profitability without regard to segments; it’s about the payback of the decision given what changes when you keep or drop the item.

Keep or drop analysis focuses on whether to continue a product, service, or segment by comparing the additional (incremental) revenues it would generate against the additional costs it would incur. The crucial point is to consider only costs and revenues that would change if the decision is made—sunk costs and any fixed costs that would remain regardless are not relevant. If the incremental revenues exceed the incremental costs (especially the avoidable costs), keeping it adds value; if not, discontinuing it is the better choice. This is exactly a decision model that weighs continuing versus discontinuing based on incremental cash flows. It isn’t about market share, broad resource allocation, or profitability without regard to segments; it’s about the payback of the decision given what changes when you keep or drop the item.