A company has two different products that sell to separate markets.Financial data are as follows:
$$\begin{array} { | l | r | r | r | }
\hline & { \text { Product A } } & \text { Product B } &{ \text { Total } } \
\hline \text { Revenue } & \$ 15,000 & \$ 9,400 & \$ 24,400 \
\hline \text { Variable costs } & ( 8,000 ) & ( 9,500 ) & ( 17,500 ) \
\hline \text { Fixed costs (allocated) } &( 2,000 ) & \underline { ( 2,000 ) } & \underline { ( 4,000 ) } \
\hline \text { Operating income (loss) } & \$ 5,000 & \$ ( 2,100 ) & \$ 2,900 \
\hline
\end{array}$$ 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:
 $$\begin{array} { | l | r | r | r | } 
\hline &  { \text { Product A } } & \text { Product B } &{ \text { Total } } \
\hline \text { Revenue } & \$ 15,000 & \$ 9,400 & \$ 24,400 \
\hline \text { Variable costs } & ( 8,000 ) & ( 9,500 ) & ( 17,500 ) \
\hline \text { Fixed costs (allocated) } &( 2,000 ) & \underline { ( 2,000 ) } & \underline { ( 4,000 ) } \
\hline \text { Operating income (loss) } & \$ 5,000 & \$ ( 2,100 ) & \$ 2,900 \
\hline
\end{array}$$ 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

The financial data provided indicates that Product B has a negative contribution margin, meaning that it is not covering its variable costs and is therefore not profitable. If dropping Product B would not impact sales of Product A, then it makes sense to drop Product B in order to reduce overall losses and focus on the more profitable Product A.

A Company Has Two Different Products That Sell to Separate