What would be the effect on income if product B were dropped? Net income would i

Question

What would be the effect on income if product B were dropped?

Net income would increase or decrease by how much?

Management is considering making a new product using product B’s equipment. If the new product’s selling price per unit were $11, its variable costs were $4, and its advertising costs were the same as for product B, how many units of the new product would the company have to sell to make the switch from product B to the new product worthwhile?(Round answers to 0 decimal places, e.g. 125.)

Delta Aluminum’s management is considering eliminating product B, which has been showing a loss for several years. The company’s annual income statement is as follows A B C Total Sales $2,210,000 $1,402,000 $1,813,500 $5,425,500 Variable expenses 1,456,000 801,900 1,096,200 3,354,100 Contribution margin $754,000 $600,100 $717,300 $2,071,400 Advertising expense $618,000 $527,000 $521,000 $1,666,000 Depreciation expense 15,700 10,000 21,700 47,400 Corporate expenses 82,600 81,600 106,700 270,900 Total fixed expenses $716,300 $618,600 $649,400 $1,984,300 Operating income $37,700 $-18,500 $67,900 $87,100
Advertising expense - Specific to each product.
Depreciation expense - Specific to each product; no other use available, no resale value.
Corporate expenses - Allocated based on number of employees.

Explanation / Answer

Segment Margin Format A B C Total Sales 2210000 1402000 1813500 5425500 Less: variable Expenses 1456000 80100 1096200 2632300 Contribution Margin 754000 600100 717300 2071400 Less: Fixed Expenses 716300 618600 649400 1984300 Operating Income 37700 -18500 67900 87100 If product B is dropped A B C Total Sales 2210000 0 1813500 4023500 Less: variable Expenses 1456000 0 1096200 2552200 Contribution Margin 754000 0 717300 1471300 Less: Fixed Expenses 716300 91600 649400 1457300 Operating Income 37700 -91600 67900 14000 The net income will decrease by 87100-14000 73100

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