A company has two different products that sell to separate markets.Financial data are as follows:
$$\begin{array} { | l | r | r | r | }
\hline & \text { Product A } & \text { Product B } &{ \text { Total } } \
\hline \text { Revenue } & \$ 15,000 & \$ 9,000 & \$ 24,000 \
\hline \text { Variable costs } & ( 7,000 ) & ( 9,200 ) & ( 16,200 ) \
\hline \text { Fixed costs (allocated) } & ( 4,000 ) & ( 1,000 ) & ( 5,000 ) \
\hline \text { Operating income (loss) } & \$ 4,000 & \$ ( 1,200 ) & \$ 2,800 \
\hline
\end{array}$$ Assume that fixed costs are all unavoidable and that dropping one product would not impact sales of the other.Because the contribution margin of Product B is negative,it should be dropped.

Question

A company has two different products that sell to separate markets.Financial data are as follows:
 $$\begin{array} { | l | r | r | r | } 
\hline & \text { Product A } & \text { Product B } &{ \text { Total } } \
\hline \text { Revenue } & \$ 15,000 & \$ 9,000 & \$ 24,000 \
\hline \text { Variable costs } & ( 7,000 ) & ( 9,200 ) & ( 16,200 ) \
\hline \text { Fixed costs (allocated) } & ( 4,000 ) & ( 1,000 ) & ( 5,000 ) \
\hline \text { Operating income (loss) } & \$ 4,000 & \$ ( 1,200 ) & \$ 2,800 \
\hline
\end{array}$$ Assume that fixed costs are all unavoidable and that dropping one product would not impact sales of the other.Because the contribution margin of Product B is negative,it should be dropped.

Quizplus · Accepted Answer

The contribution margin of Product B is negative, which means that it is losing money. Dropping Product B would increase the company's overall operating income by $1,200.

A Company Has Two Different Products That Sell to Separate