Question

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?

Answer 1

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

Step-by-step 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)