Closing a loss-making service may leave shared costs unchanged
When a service reports a loss, closing it may seem an obvious way to increase company profit. However, if its expenses include an allocation of head-office rent or administrative costs, company profit will not necessarily rise by the reported loss. Revenue can disappear while the company continues paying the same rent and salaries.
Shared costs support several services. Allocation assigns portions of those costs to each service using a chosen basis. The amount assigned in a report can differ from the payments that closure actually eliminates. Takano Sogo Accounting Office illustrates how closing a store with a loss after shared costs can reduce company profit. (撤退と投資の判断基準)
To assess closure, compare the revenue you would lose with the costs you would avoid. The hypothetical example below calculates both the service's reported loss and the change in total company profit.
Closing B eliminates its reported loss and reduces company profit
Suppose one company provides services A and B. The following table forecasts next month's results if both continue. All amounts are in Japanese yen and exclude consumption tax. To simplify the example, revenue and expenses equal cash receipts and payments in the same month; depreciation, taxes, and similar items are excluded.
Variable costs, such as outsourced work, arise with sales. Dedicated fixed costs include monthly contracts used exclusively by each service. Assume head-office rent and administrative salaries total ¥800,000, allocated as ¥500,000 to A and ¥300,000 to B.
| Forecast for next month | Service A | Service B | Company total |
|---|
| Revenue | ¥3,000,000 | ¥1,000,000 | ¥4,000,000 |
| Variable costs | ¥1,800,000 | ¥600,000 | ¥2,400,000 |
| Dedicated fixed costs | ¥400,000 | ¥200,000 | ¥600,000 |
| Profit before shared costs | ¥800,000 | ¥200,000 | ¥1,000,000 |
| Allocated shared costs | ¥500,000 | ¥300,000 | ¥800,000 |
| Profit after shared costs | ¥300,000 | −¥100,000 | ¥200,000 |
B reports ¥1,000,000 − ¥600,000 − ¥200,000 − ¥300,000 = −¥100,000. Before shared costs, however, it generates ¥200,000 toward the company's ¥800,000 of shared expenses.
Suppose B closes from next month. Its ¥1,000,000 revenue and ¥600,000 variable costs disappear, and its entire ¥200,000 of dedicated fixed costs can also be avoided. A's revenue and costs, head-office rent, and administrative salaries remain unchanged. Assume there are no closure costs.
Company profit after closure is ¥3,000,000 − ¥1,800,000 − ¥400,000 − ¥800,000 = zero. Eliminating B's reported ¥100,000 monthly loss reduces total company profit from ¥200,000 to zero. The ¥300,000 previously allocated to B still has to be paid, while B's ¥200,000 contribution toward shared costs disappears.
Changing an allocation does not change company payments
After B closes, charging all ¥800,000 of shared costs to A gives A a profit of ¥800,000 − ¥800,000 = zero. Reallocating the expense leaves the company's ¥800,000 payment unchanged.
ACCA explains that reapportioning existing fixed costs does not itself change cash flows. Closure decisions should use the revenue and costs that actually change. (Relevant costs)
For this example, the change in profit from closure is:
Change in profit = costs avoided − revenue lost − additional closure costs
For B, this is ¥600,000 + ¥200,000 − ¥1,000,000 − zero = −¥200,000. The ¥300,000 of shared costs allocated to B has not been included in avoided costs.
Moving a salary charge from B to A creates zero company savings if the same salary continues to be paid. Similarly, a dedicated monthly contract saves nothing next month if its payment remains contractually due. Check contracts and staffing plans for which payment decreases, by how much, and starting in which month, rather than relying on an expense label.
Actual reductions in shared costs can change the answer
The answer for B changes if head-office expenses can actually be reduced. The following table adds shared-cost savings to the earlier closure scenario under alternative hypothetical assumptions. Assume these changes do not affect A's sales or ability to deliver its work.
| Assumption when closing B | Change in next month's company profit compared with continuing |
|---|
| Shared costs remain unchanged | −¥200,000 |
| Shared payments decrease by ¥250,000 from next month | +¥50,000 |
| Shared payments decrease by ¥250,000 but closure also costs ¥150,000 next month | −¥100,000 |
With ¥250,000 of shared-cost savings, the effect is ¥600,000 + ¥200,000 + ¥250,000 − ¥1,000,000 = +¥50,000. If termination or other closure expenses of ¥150,000 arise in the same month, the next-month effect becomes ¥50,000 − ¥150,000 = −¥100,000.
If the closure expense occurs only once and the ¥50,000 monthly improvement continues, the six-month cumulative benefit is ¥50,000 × 6 − ¥150,000 = +¥150,000. Next month's profit and the six-month total can support different judgments, so use the same comparison period for both options.
Include effects on other services in the calculation. If B's customers also buy A and closing B reduces A's sales, add the lost revenue from A less its avoided variable costs to the financial downside of closure. Conversely, if B's staff can deliver other orders, estimate the additional profit using those orders' revenue and additional costs. Releasing staff time does not automatically reduce salary payments.
Compare total company profit with and without closure
A service's loss after allocated costs is insufficient to establish whether closing it will increase profit. In the first example, B reports a ¥100,000 monthly loss, yet closing it reduces company profit by ¥200,000 a month. Shared payments persist, and the contribution B made toward them disappears.
For an actual decision, enter revenue, payable expenses, and closure costs for both continuation and closure in a forecast covering the same period. For costs that cannot fall next month but can fall after a contract expires, specify the month when savings begin. This distinguishes eliminating a reported service loss from increasing profit for the company as a whole.
When implementing a service closure or change, publish the final date for new orders, the service period for existing customers, and contact details on your website. Customers can then understand which services remain available and the relevant dates.
SpreadSite is a no-code website builder that lets you create, publish, and update a website from Google Sheets using ready-made templates.
To create a website where you can update service details and order dates, give SpreadSite a try!
Build a website with SpreadSite →
