Question

# A company has two products: A and B. Product A has sales of \$100,000, variable cost...

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

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.

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