A company has two different products that sell to separate markets.Financial data are as follows:
$$\begin{array} { | l | r | r | r | }
\hline & \text { Product A } & \text { Product B } & { \text { Total } } \
\hline \text { Revenue } & \$ 12000 & \$ 8000 & \$ 20000 \
\hline \text { Variable cost } & ( \$ 7500 ) & ( \$ 8100 ) & ( \$ 15600 ) \
\hline \text { Fixed cost (allocated) } & ( \$ 3000 ) & ( \$ 1000 ) & ( \$ 4000 ) \
\hline \text { Profit } & \$ 1500 & ( \$ 1100 ) & \$ 400 \
\hline
\end{array}$$
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:
 $$\begin{array} { | l | r | r | r | } 
\hline & \text { Product A } & \text { Product B } & { \text { Total } } \
\hline \text { Revenue } & \$ 12000 & \$ 8000 & \$ 20000 \
\hline \text { Variable cost } & ( \$ 7500 ) & ( \$ 8100 ) & ( \$ 15600 ) \
\hline \text { Fixed cost (allocated) } & ( \$ 3000 ) & ( \$ 1000 ) & ( \$ 4000 ) \
\hline \text { Profit } & \$ 1500 & ( \$ 1100 ) & \$ 400 \
\hline
\end{array}$$ 
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 contribution margin of Product A is $25,000, which covers the fixed costs and results in a profit of $5,000. However, the contribution margin of Product B is negative, meaning it is not generating enough revenue to cover its variable costs, let alone fixed costs. However, there is no information provided about the demand or sales of each product, so it cannot be assumed that dropping Product B would have no impact on sales of Product A. Therefore, more information is needed to determine the best course of action.

A Company Has Two Different Products That Sell to Separate