A Company Has Two Different Products That Sell to Separate

question 131

Multiple Choice

A company has two different products that sell to separate markets. Financial data are as follows:
$$\begin{array} { | l | r | r | r | } \hline & \text { Product A } & \text { Product B } & { \text { Total } } \\\hline \text { Reverue } & \$ 12,000 & \$ 8,000 & \$ 20,000 \\\hline \text { Variable cost } & ( \$ 7,500 ) & ( \$ 8,100 ) & ( \$ 15,600 ) \\\hline \text { Fixed cost (allocated) } & ( \$ 3,000 ) & ( \$ 1,000 ) & ( \$ 4,000 ) \\\hline \text { Operating income } & \$ 1,500 & ( \$ 1,100 ) & \$ 400 \\\hline\end{array}$$
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Assume that fixed costs of $500 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 the impact be on total operating income?

• A) Increase $1,100
• B) Increase $600
• C) Increase $500
• D) Increase $100

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Definitions:

Dimethyl Ether

A colorless gas used as a propellant, refrigerant, and solvent, composed of two methyl groups bonded to an oxygen atom.

3-Ethylfuran

A heterocyclic organic compound with the formula C6H8O, featuring a furan ring with an ethyl substituent.

4,4-Dimethylpyran

A six-membered oxygen-containing heterocycle with two methyl groups attached to the fourth carbon.

Ethers

A class of organic compounds containing an oxygen atom connected to two alkyl or aryl groups.