Question

A company has two different products that are sold in different markets. Financial data are as​ follows: Product A Product B Total Revenue ​$15,000 ​$9,400 ​$24,400 Variable cost ​(7,000) ​(9,800) ​(16,800) Fixed cost​ (allocated) ​(3,000) ​(2,100) ​(5,100) Operating income​ (loss) ​$5,000 ​$(2,500) ​$2,500 Assume that fixed costs are all unavoidable and 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

Operating Income of the Company will increase by $400

Step-by-step explanation:

Financial Data without Product B:

Revenue $15,000

Variable Cost $(7,000)

Fixed Cost (Allocated) $(5,100)

Operating Income / (Loss) $2,900

So,

Operating Income without Product B $2,900

Operating Income with both Products $2,500

Difference $400

Based on the assumption that fixed costs are all unavoidable, if Product B is dropped, total fixed costs will be allocated to Product A. Moreover, revenue and variable costs of Product A are not impacted by dropping Product B.

Therefore, Operating Income of the company will increase by $400, if Product B is dropped.

*Please note that figure in brackets represent negative values.