A company has two different products that are sold in different markets.Financial data are as follows: $$\begin{array} { | l | r | r | r | }
\hline & \text { Product A } & \text { Product B } & \text { Total } \
\hline \text { Revenue } & \$ 16,000 & \$ 9,400 & \$ 25,400 \
\hline \text { Variable cost } & ( 9,000 ) & ( 9,900 ) & ( 18,900 ) \
\hline \text { Fixed cost (allocated) } & \$ 3,000 ) & \underline { ( 2,100 ) } & \underline { ( 5,100 ) } \
\hline \text { Operating income (loss) } & \$ 4,000 & \$ ( 2,600 ) & \$ 1,400 \
\hline
\end{array}$$ Assume that fixed costs are all unavoidable and 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: $$\begin{array} { | l | r | r | r | } 
\hline & \text { Product A } & \text { Product B } & \text { Total } \
\hline \text { Revenue } & \$ 16,000 & \$ 9,400 & \$ 25,400 \
\hline \text { Variable cost } & ( 9,000 ) & ( 9,900 ) & ( 18,900 ) \
\hline \text { Fixed cost (allocated) } & \$ 3,000 ) & \underline { ( 2,100 ) } & \underline { ( 5,100 ) } \
\hline \text { Operating income (loss) } & \$ 4,000 & \$ ( 2,600 ) & \$ 1,400 \
\hline
\end{array}$$ Assume that fixed costs are all unavoidable and 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 will lose its operating income of $(2,600), but will save the variable costs of $9,900. The fixed costs of $2,100 are unavoidable. Therefore, the impact on total operating income will be an increase of $500 ($9,900 - $2,600 - $2,100).

A Company Has Two Different Products That Are Sold in Different