Add-or-drop a segment

Add-or-drop a segment is the decision to retain or eliminate a product line, department, or customer group. Dropping a loss-making segment only improves profit if the avoidable costs saved exceed the contribution margin lost.

Also known askeep or drop

ByHoang TruongUpdated June 30, 2026

FrameworkRelevant costing

See it move

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A waterfall chart opens at Sector B's contribution of €32,000 and subtracts €15,000 of avoidable fixed costs — the savings that would result from dropping the segment — leaving a net benefit of keeping of €17,000. Because contribution exceeds the avoidable cost saving, closing Sector B would reduce overall profit by €17,000.

Where it fits

SubjectCost AccountingAdvancedTopicRelevant Costs & Decision-MakingAdvanced

The formula

LaTeX

\Delta\pi = FC_{avoid} - CM_{lost}

Variables

$Δ π$: Change in firm profit from dropping the segment (€)
$F C_{a v o i d}$: Avoidable fixed costs that disappear on closure (€)
$C M_{l os t}$: Contribution margin foregone on closure (€)

Drop only if avoidable costs saved exceed the contribution margin lost; keep the segment otherwise.