A company has two different products that sell to separate markets. Financial data are as follows: Assume that fixed costs of $500 could be eliminated if product B was dropped; assume furthermore that dropping one product would not impact sales of the other. If Product B is dropped, what would the impact be on total operating income?

Question

A company has two different products that sell to separate markets. Financial data are as follows:  Assume that fixed costs of $500 could be eliminated if product B was dropped; assume furthermore that dropping one product would not impact sales of the other. If Product B is dropped, what would the impact be on total operating income?

Quizplus · Accepted Answer

Dropping Product B would eliminate $700 of variable costs but also reduce revenue by $200, resulting in a net increase in operating income of $500. Therefore, the total operating income would increase by $600 ($500 + $100) if Product B is dropped.

A Company Has Two Different Products That Sell to Separate