A Company Has Two Different Products That Are Sold in Different

question 85

Multiple Choice

A company has two different products that are sold in different markets.Financial data are as follows: $$\begin{array} { | l | r | r | r | } \hline & \text { Product A } & \text { Product B } & \text { Total } \\\hline \text { Revenue } & \$ 17,000 & \$ 9,400 & \$ 26,400 \\\hline \text { Variable cost } & ( 8,000 ) & ( 9,700 ) & ( 17,700 ) \\\hline \text { Fixed cost (allocated) } & \underline { ( 1,000 ) } & \underline { ( 2,000 } & \underline { ( 3,000 ) } \\\hline \text { Operating income (loss) } & \$ 8,000 & \$ ( 2,300 ) & \$ 5,700 \\\hline\end{array}$$ 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?

• A) increases by $2,000
• B) increases by $300
• C) decreases by $2,000
• D) decreases by $300

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Definitions:

Variable Production Costs

Costs that vary directly with the level of production output, such as raw materials and direct labor.

Absorption Costing

An accounting method that includes all manufacturing costs, both variable and fixed, in the cost of producing each unit of a product.

Variable Costing

An accounting method that only allocates variable costs to the inventory; fixed manufacturing overhead is expensed as incurred.

Cost Structure

The composition of a company's costs, both fixed and variable, that are incurred in the operation of its business.