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: Operating Income of the Company will increase by $400
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,
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