Final answer:
Eliminating an unprofitable product line can sometimes lower overall net income due to the reallocation of fixed costs, loss of sales synergy, layoffs affecting productivity, and negative impacts on consumer perception and competitive positioning. A careful analysis is needed to determine the implications of such a decision.
Step-by-step explanation:
Eliminating an unprofitable product line may seem like a straightforward decision to improve a company's net income in the short term. However, there are circumstances where this action could lead to lower overall net income. One such scenario involves the concept of allocated fixed costs that are spread across various product lines. If the unprofitable product line is eliminated, these fixed costs must be absorbed by the remaining product lines, potentially reducing their profitability. Furthermore, there may be loss of sales synergy where the eliminated product was driving sales of other more profitable items, leading to a decrease in total revenue.
Additionally, eliminating a product line could lead to layoffs and a reduction in employee morale, affecting productivity across the remaining lines. Consumer perception might also be negatively impacted, causing existing customers to turn to competition with better or cheaper products. This competition can reduce the business's profits and market share, resulting in a subsequent fall in net income.