Now, let's consider another decision whether to keep or drop a product line. This is a decision many managers face when it appears a product is not profitable. As an example, the T-shirt Maker is considering discontinuing the deluxe t-shirt product line, because it reported a loss of $3,000. Recall our decision-making framework. First, we define the decision to be made. That decision is whether to keep or to drop the deluxe t-shirt product line. Second, we identify the alternatives. There are two alternatives here. Keep the product line or discontinue it. And third, we gather the information relevant to making the decision. But what information is that? Well, the revenues that the company would forego and the costs that the company would avoid if the product line is dropped. Then after an analysis, we can evaluate and decide which alternative to choose. So, we have two alternatives. Alternative one is to continue to make the deluxe t-shirts. Alternative two is to drop the product line. With alternative one, revenues and costs will remain as is in the current state, but if the company chooses alternative two to discontinue the product line, it will give up some revenues, the revenues that the product line is generating, and it will avoid incurring some costs. So, those revenues and costs are relevant to the decision and we would choose the alternative that generates more profit. Now, let's take a look at the profitability of the deluxe t-shirt. The data from the financial accounting system show that the deluxe t-shirt product line reported a loss of $3,000. The T-shirt Maker is considering discontinuing the t-shirt product line since it's not profitable. Now at first, we might be tempted to use information obtained directly from the financial accounting system without any modifications to do our analysis. Recall that the price for the deluxe t-shirt is $15, and the total cost for the deluxe t-shirt is $16.50. If we used that information, and assumed that dropping the product line would result in lower sales of $15 per shirt and lower cost of $16.50 per shirt, seems like we should drop the product line because it looks like we would give up $30,000 in revenues but avoid $33,000 in cost. But some of the costs that make up that $16.50 per unit cost may not be avoidable if we drop the product line. Remember that some of the $16.50 per unit is variable and some is fixed. Now, if we dropped the product line, we would avoid incurring those variable cost. However, we would not expect to be able to get rid of all the fixed cost. So, lets go back to our cost data for the deluxe t-shirt. Rearranged into variable cost and fix cost. And let's look to see which of those costs are avoidable and which are not avoidable if we dropped the product line. Well, the variable costs are avoidable if we drop the product line and for the moment, let's suppose none of the fix costs are avoidable. And now let's use that information to do our analysis. If we keep the product line, there is no additional revenues or cost, but if we drop the product line, we do lose the $30,000 in revenues which would be fine if the costs that we would avoid are greater than that. But we can only avoid incurring the variable costs of $18,540. So, dropping the product line would result in losing $11,460 in profit which is the contribution margin being generated by the deluxe t-shirt product line. So, we should keep it. Now, suppose we could actually cut some of the fixed cost if we dropped the product line. How much in fixed costs would we have to be able to cut or avoid if we dropped the product line in order for that alternative to be the preferred one? Yeah, $11,460. If we could avoid $11,460 in fixed costs, then the total costs we would avoid would be the $18,540 plus the $11,460 in fixed costs for a total of $30,000. Exactly equal to the revenues we would be giving up. So, at that point, we would be indifferent to keeping or dropping the product line.