A company has two different products that are sold in different markets.Financial data are as follows: $$\begin{array} { | l | r | r | r | }
\hline & \text { Product A } & \text { Product B } & \text { Total } \
\hline \text { Revenue } & \$ 18,000 & \$ 9400 & \$ 27,400 \
\hline \text { Variable cost } & ( 8000 ) & ( 9800 ) & ( 17,800 ) \
\hline \text { Fixed cost (allocated) } & \underline { ( 1000 ) } & \underline { ( 2000 ) } & \underline { ( 3000 ) } \
\hline \text { Operating income (loss) } & \$ 9000 & \$ ( 2400 ) & \$ 6600 \
\hline
\end{array}$$ Assume that fixed costs of $1000 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: $$\begin{array} { | l | r | r | r | } 
\hline & \text { Product A } & \text { Product B } & \text { Total } \
\hline \text { Revenue } & \$ 18,000 & \$ 9400 & \$ 27,400 \
\hline \text { Variable cost } & ( 8000 ) & ( 9800 ) & ( 17,800 ) \
\hline \text { Fixed cost (allocated) } & \underline { ( 1000 ) } & \underline { ( 2000 ) } & \underline { ( 3000 ) } \
\hline \text { Operating income (loss) } & \$ 9000 & \$ ( 2400 ) & \$ 6600 \
\hline
\end{array}$$ Assume that fixed costs of $1000 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 $1000 in fixed costs and loses $9400 in revenue but also saves $9800 in variable costs. The net effect is an increase in operating income by $1400 ($9800 - $9400 + $1000).

A Company Has Two Different Products That Are Sold in Different