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
Sales revenue  ................     $120,000        $180,000       $145,000
Costs:
     Variable costs ...........       78,000          54,000         87,000
     Advertising ..............       12,000           7,000          8,000
     Rent .....................       10,000          10,000         10,000
     Supervisor's salary ......       25,000          35,000         30,000
     Property taxes ...........       10,000           6,000          2,000
Net income/loss ...............      <15,000>         68,000          8,000

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.

The president of the company is considering eliminating Product A.  If ABC
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
Increase in company profits if Product A is dropped = ($ 5,000)

(It means that there is a decrease in profits)

Calculations:

If Product A is not dropped

	Product A	Product B	Product C	Total
Sales revenue	$ 120,000	$ 180,000	$ 145,000	$ 445,000
Variable costs	$   78,000	$   54,000	$   87,000	$ 219,000
Contribution margin	$   42,000	$ 126,000	$   58,000	$ 226,000
Less: Fixed cost				$            -
Advertising	$   12,000	$      7,000	$      8,000	$   27,000
Rent	$   10,000	$   10,000	$   10,000	$   30,000
Supervisor's salary	$   25,000	$   35,000	$   30,000	$   90,000
Property taxes	$   10,000	$      6,000	$      2,000	$   18,000
Total fixed expenses	$   57,000	$   58,000	$   50,000	$ 165,000
Net income/loss	$ (15,000)	$   68,000	$      8,000	$   61,000

If Product A is dropped

	Product A	Product B	Product C	Total
Sales revenue	$            -	$ 180,000	$ 145,000	$ 325,000
Variable costs	$            -	$   54,000	$   87,000	$ 141,000
Contribution margin	$            -	$ 126,000	$   58,000	$ 184,000
Less: Fixed cost				$            -
Advertising	$            -	$      7,000	$      8,000	$   15,000
Rent	$   10,000	$   10,000	$   10,000	$   30,000
Supervisor's salary	$            -	$   35,000	$   30,000	$   65,000
Property taxes	$   10,000	$      6,000	$      2,000	$   18,000
Total fixed expenses	$   20,000	$   58,000	$   50,000	$ 128,000
Net income/loss	$ (20,000)	$   68,000	$      8,000	$   56,000

The decrease in profits = $61,000 - $56,000 = $ 5,000

In case of any doubt, please comment.