A company has two different products that sell to separate markets.Financial data are as follows:
$$\begin{array} { | l | r | r | r | }
\hline & \textbf { Product A } & \textbf { Product B } & { \textbf { Total } } \
\hline \text { Revenue } & \$ 16,000 & \$ 9,200 & \$ 25,200 \
\hline \text { Variable costs } & ( 6,000 ) & ( 9,300 ) & ( 15,300 ) \
\hline \text { Fixed costs (allocated) } & \underline{( 3,000 )} & \underline{( 900 )} & \underline{( 3,900 )} \
\hline \text { Operating income (loss) } & \underline{\$ 7,000} & \underline{\$ ( 1,000 )} & \underline{\$ 6,000} \
\hline
\end{array}$$ 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:
 $$\begin{array} { | l | r | r | r | } 
\hline & \textbf { Product A } & \textbf { Product B } & { \textbf { Total } } \
\hline \text { Revenue } & \$ 16,000 & \$ 9,200 & \$ 25,200 \
\hline \text { Variable costs } & ( 6,000 ) & ( 9,300 ) & ( 15,300 ) \
\hline \text { Fixed costs (allocated) } & \underline{( 3,000 )} & \underline{( 900 )} & \underline{( 3,900 )} \
\hline \text { Operating income (loss) } & \underline{\$ 7,000} & \underline{\$ ( 1,000 )} & \underline{\$ 6,000} \
\hline
\end{array}$$ 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

Since the contribution margin of Product B is negative, dropping it would lead to a reduction in total fixed costs and increase the overall profitability of the company. Dropping it would not impact sales of the other product as they sell to separate markets. Therefore, it is true that Product B should be dropped.

A Company Has Two Different Products That Sell to Separate