A company has two different products that are sold in different markets. Financial data are as follows:

- Product A Product B Total

Revenue $ 18,000 $ 9,300 $ 27,300

Variable cost (7,000 ) (9,900 ) (16,900 )

Fixed cost (allocated) (3,000 ) (2,200 ) (5,200 )

Operating income (loss) $ 8,000 $ (2,800 ) $ 5,200

Assume that fixed costs of $ 2,000 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

Business

Trenton Webster

3 April, 20:54

A company has two different products that are sold in different markets. Financial data are as follows:

- Product A Product B Total

Revenue $ 18,000 $ 9,300 $ 27,300

Variable cost (7,000 ) (9,900 ) (16,900 )

Fixed cost (allocated) (3,000 ) (2,200 ) (5,200 )

Operating income (loss) $ 8,000 $ (2,800 ) $ 5,200

Assume that fixed costs of $ 2,000 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?

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Answers (1)

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Urijah Fuentes · Answer 1

If Product B is dropped, the total operating income of the company will increase from $5,200 to $7,800.

Explanation:

If Product B isdropped, the total fixed cost will reduce from $5,200 to $3,200 = ($5,200 - $2,000), while revenue and variable cost of Product B is 0.

The operating income is $7,800 = (revenue of $18,000 - variable cost of $7,000 - fixed cost of $3,200)