A company has two different products that sell to separate markets.Financial data are as follows:
$$\begin{array} { | l | r | r | r | }
\hline & \text { Product A } & \text { Product B } & { \text { Total } } \
\hline \text { Revenue } & \$ 15,000 & \$ 9,000 & \$ 24,000 \
\hline \text { Variable costs } & ( 7,000 ) & ( 9,200 ) & ( 16,200 ) \
\hline \text { Fixed costs (allocated) } & ( 4,000 ) & \underline { ( 1,000 ) } & \underline { ( 5,000 ) } \
\hline \text { Operating income (loss) } & \$ 4,000 & \$ ( 1,200 ) & \$ 2,800 \
\hline
\end{array}$$ 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:
 $$\begin{array} { | l | r | r | r | } 
\hline & \text { Product A } & \text { Product B } & { \text { Total } } \
\hline \text { Revenue } & \$ 15,000 & \$ 9,000 & \$ 24,000 \
\hline \text { Variable costs } & ( 7,000 ) & ( 9,200 ) & ( 16,200 ) \
\hline \text { Fixed costs (allocated) } & ( 4,000 ) & \underline { ( 1,000 ) } & \underline { ( 5,000 ) } \
\hline \text { Operating income (loss) } & \$ 4,000 & \$ ( 1,200 ) & \$ 2,800 \
\hline
\end{array}$$ 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

Based on the given financial data, Product A has a contribution margin of $55,000 ($120,000 - $65,000) and Product B has a negative contribution margin of -$10,000 ($25,000 - $35,000). This means that for every unit of Product B sold, the company is losing $10,000 towards its fixed costs and overall profitability. Dropping Product B would eliminate this loss and allow the company to focus on the profitable Product A.

A Company Has Two Different Products That Sell to Separate