01 / Learn the method
Learning outcomes
Separate avoidable economics from allocated overhead. Calculate the result, reconcile it and communicate its limitations.
Method
Contribution is revenue less variable cost. Allocated overhead is an attribution rule, not necessarily a cost that disappears if a product closes. For a discontinuation decision compare contribution lost with fixed cost actually avoided and any credible alternative use of released capacity.
Smaller worked example
A product contributes $8,000 and receives $10,000 allocated overhead. If only $2,000 of overhead disappears on closure, closing it reduces company profit by $6,000 despite its reported loss.
02 / Put it to work
Business context and rules
Fictional Harbor Products, September 2026. A: 1,000 units, price $50, variable unit cost $30; B: 500 units, price $80, unit cost $50; C: 200 units, price $100, unit cost $80. Shared fixed cost is $30,000, allocated A $12,000 / B $10,000 / C $8,000. Only $1,000 fixed cost is avoidable if C closes. C uses 2 machine-hours/unit; A uses 1. A could sell up to 300 extra units if C closes, with no new fixed costs. B demand cannot expand. No other capacity use is available. Ignore taxes and closure costs.
Original synthetic inputs
| Input | Value | Unit |
|---|---|---|
| A units | 1000 | units |
| A price | 50 | USD / unit |
| A variable cost | 30 | USD / unit |
| B units | 500 | units |
| B price | 80 | USD / unit |
| B variable cost | 50 | USD / unit |
| C units | 200 | units |
| C price | 100 | USD / unit |
| C variable cost | 80 | USD / unit |
| Total shared fixed cost | 30000 | USD |
| A allocated fixed cost | 12000 | USD |
| B allocated fixed cost | 10000 | USD |
| C allocated fixed cost | 8000 | USD |
| C avoidable cost | 1000 | USD |
| C machine hours/unit | 2 | hours / unit |
| A machine hours/unit | 1 | hours / unit |
| Extra A demand cap | 300 | units |
Required deliverables
Build contribution and allocated-profit views. Compare keeping C, closing C with idle capacity and closing C with extra A sales. Explain which demand and cost assumptions management must confirm.
Use formulas for derived amounts and preserve source data. Put narrative deliverables in the workbook response area; expand it as needed. Compare amounts within 0.01 of the stated unit and percentages within 0.1 percentage point. No unsupported balancing plugs.
03 / Review your work
Try the assignment before opening the answer.
Open the worked answer and teaching notes
Worked numerical schedule
| Measure | Value | Unit |
|---|---|---|
| A contribution | 20,000.00 | USD |
| B contribution | 15,000.00 | USD |
| C contribution | 4,000.00 | USD |
| A allocated profit | 8,000.00 | USD |
| B allocated profit | 5,000.00 | USD |
| C allocated profit | -4,000.00 | USD |
| Company profit | 9,000.00 | USD |
| Close C without replacement: profit change | -3,000.00 | USD |
| Additional A units possible | 300.00 | units |
| Close C and expand A: profit change | 3,000.00 | USD |
| Allocation residual | 0.00 | USD |
Interpretation and recommended actions
Contributions are $20,000 / $15,000 / $4,000; allocated profits $8,000 / $5,000 / -$4,000. Company profit is $9,000. Closing C alone reduces profit $3,000. Replacing part of released capacity with 300 A units adds $6,000 contribution, producing a net $3,000 improvement. Recommend the replacement only if the incremental A demand and $1,000 avoidability are supported; the allocation itself is not decision evidence.
Scoring rubric - 100 points
| Dimension | Points | Awarding guidance |
|---|---|---|
| Calculation | 40 | Contribution view 15; allocated view 10; three-option economics 15. |
| Interpretation | 25 | Correct application of the case rules 10; explain the business decision 10; identify evidence or limitations 5. |
| Controls / audit trail | 20 | Traceable formulas 8; independent reconciliation 8; explicit units and signs 4. |
| Communication | 15 | Decision and numerical headline 5; actions with owners and evidence 5; concise response covering all required deliverables 5. |
Award method credit after an isolated arithmetic error rather than repeatedly deducting for it. Equivalent account labels and well-supported alternative recommendations are acceptable. Numerical tolerance is 0.01 in the stated units; no universal passing score is prescribed.
Common mistakes
Assuming all C overhead disappears; ignoring demand limits; allocating shared costs twice.
Staged hints
Calculate lost contribution first. Then add avoidable fixed costs. Use the lower of released capacity and incremental demand.
Instructor notes
Prerequisites: Fixed and variable costs. Suggested use of the estimated 45 minutes: spend roughly 15% on the lesson and smaller example, 55% on the independent task, 20% on comparing approaches and 10% on the decision discussion. Timing is untested. Ask learners to explain why the numerical check is necessary but not sufficient.
For a simpler class, provide the model structure and work through one driver. For an extension, change one operational assumption and require a new reconciliation and recommendation. Verify the new key before distributing any variant. Open files in the intended spreadsheet application before class. Solutions are learning resources, not secure hiring examinations. Expert review remains pending.
Continue this learning path
CON-02 · Material and Labour Variances: Find the Operational Cause
CON-03 · A Profitable Division with Weak Controls
AI-assisted synthetic teaching case. Expert review and native Excel / Sheets testing pending.