A company has two different products that are sold in different markets. Financial data are as follows: $$\begin{array} { | l | r | r | r | }
\hline & \text { Product A } & \text { Product B } & \text { Total } \
\hline \text { Revenue } & \$ 17,000 & \$ 9300 & \$ 26,300 \
\hline \text { Variable cost } & ( 8000 ) & ( 9800 ) & ( 17,800 ) \
\hline \text { Fixed cost (allocated) } & \underline { ( 1000 ) } & \underline { ( 2100 ) } & \underline { ( 3100 ) } \
\hline \text { Operating income (loss) } & \$ 8000 & \$ ( 2600 ) & \$ 5400 \
\hline
\end{array}$$ Assume that fixed costs of $2000 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 be the impact on total operating income of the company?

Question

A company has two different products that are sold in different markets. Financial data are as follows: $$\begin{array} { | l | r | r | r | } 
\hline & \text { Product A } & \text { Product B } & \text { Total } \
\hline \text { Revenue } & \$ 17,000 & \$ 9300 & \$ 26,300 \
\hline \text { Variable cost } & ( 8000 ) & ( 9800 ) & ( 17,800 ) \
\hline \text { Fixed cost (allocated) } & \underline { ( 1000 ) } & \underline { ( 2100 ) } & \underline { ( 3100 ) } \
\hline \text { Operating income (loss) } & \$ 8000 & \$ ( 2600 ) & \$ 5400 \
\hline
\end{array}$$ Assume that fixed costs of $2000 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 be the impact on total operating income of the company?

Quizplus · Accepted Answer

If Product B is dropped, the company saves $2000 in fixed costs and loses the operating loss of $2600 from Product B, resulting in a net increase of $2000 + $2600 = $4600. However, the total operating income would be $8000 (from Product A) - $3100 (remaining fixed costs) = $4900, which is $500 less than the current total operating income of $5400. Therefore, the increase is $2500.

A Company Has Two Different Products That Are Sold in Different