A company has two different products that sell to separate markets. Financial data are as follows:
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:
  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

Since the contribution margin of Product B is negative, it means that the variable costs associated with producing and selling the product is greater than the revenue generated from it. Therefore, dropping Product B would result in a reduction of losses and improve the overall profitability of the company. Additionally, since the sales of one product do not impact the sales of the other, dropping Product B would not have any adverse effects on the sales of Product A.

A Company Has Two Different Products That Sell to Separate