Definition of death spiral (costing-based)

Some of an entity's overhead costs are either fixed (in that they remain the same irrespective of the volume of production or service-providing activity) or are semi-variable (in that a portion of the cost is fixed).  Eliminating a product or service can increase the overhead rate used to cost products or services because these fixed or semi-variable costs (the numerator in the overhead rate) remain the same or decrease more slowly than the cost allocation base (the denominator), which is often related to the expected number of products or services offered. The higher overhead rate increases the overhead costed to remaining products or services. If any products or services are subsequently eliminated, the burden rate may increase again.  In theory, the product eliminations and the subsequent increases in the overhead rates could continue until all products become too expensive and are therefore eliminated, resulting in no products left to sell.


Suppose an airline cancelled a route out of an airport.  The remaining fixed and semi-variable costs associated with maintaining gates at the airport would be allocated to the routes still offered.  If any of those routes became too expensive, they are cancelled, and the remaining fixed and semi-variable costs are re-allocated to the remaining routes at the airport, in theory until a point where the airline no longer offers flights at that airport. [1]

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