Question

ABC Company sells three products. Income statements for the three products for the most recent year appear below: Product A Product B Product C $145,000 Sales revenue $120,000 $180,000 Costs: Variable costs 78,000 12,000 10,000 25,000 10,000 54,000 87,000 8,000 10,000 30,000 2,000 8,000 Advertising 7,000 10,000 35,000 6,000 68,000 Rent Supervisor's salary Property taxes Net income/loss <15,000> The rent is allocated to the three products equally and the property taxes are allocated based on the square footage each product uses in the factory. If ABC The president of the company is considering eliminating Product A. Company eliminates Product A, sales of Product B are expected to increase by $10,000. Calculate the increase in company profits if Product A is dropped.

Answer 1

Answer:

Rent: Here the rent is allocated equally, before eliminating the Product A the rent was $30,000 ($10,000+$10,000+$10,000).

After elimination of Product A the rent of $30,000 should be allocated to both Product B & C equally.

$15,000 to Product B and $15,000 to Product C.

Property Taxes: Before elimination of Product A,property taxes are allocated in the ratio of 5:3:1 ($10,000:$6,000:$2,000).

The total property taxes are $18,000 ($10,000+$6,000+$2,000).

After elimination of Product A, the property taxes should be allocated to Product B & C in the ratio of 3:1.(Because there is no information regarding the square footage occupied by the each product).

$13,500 to Product B and $4,500 to Product C.

It is given that sales of Product B will be increased by $10,000 if Product A is eliminated.

So Revised Sales of Product B are $190,000.

Revised Income statements of the company

Particulars	Product B	Product C
Sales Revenue	$190,000	$145,000
Costs:
Variable Costs	$54,000	$87,000
Advertising	$7,000	$8,000
Rent	$15,000	$15,000
Supervisor Salary	$35,000	$30,000
Property Taxes	$13,500	$4,500
Net Income/Loss	$65,500	$500

Company Profits before dropping Product A are $61,000 ($68,000+$8,000-$15,000)

Company Profits after dropping Product A are $66,000 ($65,500 + $500)

Increase in Company Profits after dropping Product A is $5,000. ($66,000 - $61,000)