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Sir there is a question in kit that Ace ltd is considering whether or not to cease production of leather bound diaries. Which of the following items are valid factors to consider in this decision.
1) The diaries made a loss in the year just passed
2) The diaries made a positive contribution in the year just passed
3)The market outlook in the long term looks very poor
4) The budget for next year shows a loss
5) The business was founded to produce and sell diaried
6) The business also sells pens and many diary buyers will often also buy a penSir which of the items will come? And secondly in such questions is their any general rule or technique to select the items?
I am surprised that you do not have an answer to this in your kit and that you are therefore having to ask me the answer!!
I stress in several of my lectures (e.g. in life-cycle costing, in performance measurement) that when making decisions like this it is what is expected to happen in the future that matters – what has happened in the past is of no relevance.
Whether they were making profits or losses in the past is irrelevant – it is whether they expect to make profits of losses in the future that is important.Therefore 1 and 2 are irrelevant. 5 is obviously irrelevant.
3 is obviously relevant
6 is also relevant because it could be worth losing money on diaries if it means they would make bigger profit on pens
4 is only slightly relevant – just because it was likely to lose money next year, it could be that it would make big profits in later years.
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