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Giant Company has three products, A, B, and C. The following information is available:

Product A Product B Product C
Sales $70,000 $97,000 $23,000
Variable costs 37,000 51,000 15,000
Contribution margin 33,000 46,000 8,000
Fixed costs:
Avoidable 10,000 20,000 2,000
Unavoidable 7,000 12,000 9,400
Operating income $16,000 $14,000 $(3,400)

Giant Company is thinking of dropping Product C because it is reporting a loss. Assuming Giant drops Product C and does NOT replace it, operating income will ________.

Respuesta :

Answer:

$24,000

Explanation:

                             Product A      Product B     Product C

sales                        70,000            97000

Variable  cost           37000            51000

Contribution margin 33000            46000

Avoidable cost          10,000           20000

Unavoidable cost       7000             12000         9400

Operating income      16000            14000

Total operating income if product C is dropped is (16000+14000 +3400-9400)

=$24000

Please note that Giant company with still incur the unavoidable cost even if the product is dropped. This is assumed to be a portion of the fixed overhead expenses allocated to the product in the course of normal operation.However , the loss made of 3400 will be avoided as well

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