Answer:
When you keep selling you will have a loss of $14000
And when you do not sell Product B you will have a profit of $ 8000.
So It is advisable to drop Product B.
Explanation:
ABC Corporation
Income Statement
Total A B
Sales 930,000 575,000 355,000
Variable Costs 507,000 267,000 240,000
Contribution Margin 423,000 308,000 115,000
Fixed Costs
Manufacturing 375,000 225,000 150,000
Selling & Administrative
62,000 45000 17000
Total F. Costs 437,000 270,000 167,000
Opertng Income (loss)(14000) 38,000 (52,000)
ABC Corporation
Differential Analysis
Keep Selling Does Not Difference
Keep Selling Variances
Sales 930,000 575,000 (355,000)
Var. Costs 507,000 267,000 240,000
C. M 423,000 308,000 (115,000)
Fixed Costs
Manufacturing 375,000 255,000 120,000
Selling &
Administrative 62,000 45000 17000
Total F. Cost 437,000 300,000 137,000
Oprting. P (loss) (14000) 8,000 (22,000)
We see that when the company is selling Product B it has a loss of $ 14000 and when it does not sell Product B it has a profit of $ 8000. Therefore it is advisable to stop selling product B. If we look at the variances the Sales revenue decreases by $ 355,000 and so do the variable costs by $ 240,000.There is a decrease in the Contribution Margin but there is an increase in the net income so the Product B must not be sold.
