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ABC Tax is evaluating the profitability of their two customers, A and B. Total fixed costs...

ABC Tax is evaluating the profitability of their two customers, A and B. Total fixed costs are allocated evenly between customer A and B, and will remain the same whether they add or drop customers. Should ABC Tax drop customer B? The profit/loss for each customer is shown below. Should customer B be dropped?


A B
Revenue 250,000 140,000
Variable costs 112500 63000
Contribution margin 137,500 77,000
Allocated fixed costs 80000 80000
Customer profit (loss) 57,500 -3,000


No, profit will decrease if Customer B is dropped.

Yes, because any customer showing a loss should be dropped.

Yes, because their revenues are much lower than Customer A.

Yes, profit will increase if Customer B is dropped.
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Answer #1

answers is option a) No, profit will decrease if Customer B is dropped.

Total allocated fixed cost will remain same. thus it will decrease profit

Total profit if customer B Continued (57,500-3,000) $ 54,500
Total profit if customber B Dropped (57,500-80,000) $ -22,500
Profit reduced by $ -77,000
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