Question

A company has two products: A and B. Product A has sales of $100,000, variable cost of $50,000, direct fixed costs of $40,000, and allocated common fixed costs of $20,000. Product B has sales of $150,000, variable cost of $70,000, direct fixed costs of $30,000, and allocated common fixed costs of $40,000. If product A is dropped, what will be the profit of the company?. Single choice.

$10,000 profit

$0 (no profit or loss)

$10,000 loss

$20,000 profit

Answer 1

If product A is dropped, common fixed costs allocated to product A will be absorbed by Product B.

Sales of product B = $150,000

Variable cost of product B = $70,000

Direct fixed costs of product B = $30,000

Common fixed costs of product A = $20,000

Common fixed costs of product B = $40,000

Total fixed costs to be absorbed by product B, if product A is dropped = Direct fixed costs of product B + Common fixed costs of product A + Common fixed costs of product B

= 30,000+20,000+40,000

= $90,000

Profit = Sales of product B - Variable cost of product B - Total fixed costs

= 150,000-70,000-90,000

= $10,000

the profit of the company = $10,000

First option is correct.