For example, a company which strikes oil may decide to produce or Mobil oil, kerosene, gas, wax, etc.
#Other words for multiple revenue lines how to
(4) Management must examine whether it has the requisite know how to produce and sell the product.įactors Determining the Scope of product-Line :Ī company may decide to add a product which may be the result of a common production process. For it may well be preferable to accept temporary excess capacity than to create production bottlenecks, when the excess disappears. (3) If the excess capacity is temporary, management must look whether the product can be abandoned when the demand for other products recovers. If, however, the product competes with existing items of the product-line, the contribution estimates will have to be adjusted downward.
In such a case the contribution to overhead and profits by introducing the new product will be greater that the direct contribution of the product itself. If the product complements the product-line, it will increase the sales of other products. (2) The management should also appraise the impact of the new product on the products already manufactured. In other words, the opportunity costs of alternative uses of excess capacity must be estimated. Before taking a final decision, all the available opportunities and alternatives should be explored and examined and the best one chosen. (1) The management should not introduce a new product if an even better new product is available. In product-line decisions, the management should also keep in view the following considerations: Of course, before deciding to add to the product-line, a forecast of the demand for that product and the costs involved in the addition will have to be made. If the net return is more than the rectums provided by alternative investment opportunities, a product may be added to the product-line. Incremental costs of adding the product are to be compared with incremental rectums. In fact, the decision about adding a new product is no different from other managerial decisions. Thus, profitability is the crucial test for adding to the product-line. Even these objectives, however, may merge with the long-run objective of profit maximization. Other short-run objectives are continued existence of the firm, market share, volume growth, comfortable cash reserves, cordial labor relations, etc. In the short-run, however, income stability may be the more important goal. In the long run, profit maximization may be the objective of optimum product-line. Granted that there are sufficiently strong pressures on the part of the firm to diversify its product line, the question is what are the goals sought to be achieved by the firm in increasing its product-line. Profit as Criterion of Optimum Product-line :
Vertical integration makes this possible. Sometimes, a firm may have to pay lower prices if it purchases two or more products simultaneously. Moreover, a purchasing firm can supply its own needs of raw materials and semi-finished components more economically through integration that by directly purchasing from the market. There may be an economic motive to integrate whenever lower production costs would result by fuller utilization of plant capacity or managerial, marketing and research capacities.
The most obvious reason is to get a strategic market advantage. The reasons for vertical integration may, however, be many. Excess capacity may result from secular shifts in markets, tastes, buying habits, etc., leaving the firm with under-utilized capacity and know-how.įinally, the existence of an excess capacity may be the result of vertical integration. Over-capacity may further be caused by cyclical fluctuations in sales. Companies faced with seasonal demand for their products would certainly find it advisable to add to their product-line in off-season a new product to make up for the loss because of idle capacity. In such a case, if anticipated level of demand is not forthcoming, the firm develops excess capacity.Įxcess capacity may be due to seasonal variations in demand also, the latter being a result of weather and custom, e.g., greeting cards, ice-cream, etc. It may be the result of an unduly over optimistic estimated market for the firm’s products. Broadly conceived, excess capacity is said to exist when it would cost the multiple product firm less to make and sell the new product than it would cost a new company set up to produce only that product.Įxcess capacity may occur for several reasons. The presence of excess production capacity is perhaps the most important single factor leading to product-line diversification.
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