Question

ZZ, Inc. 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 ........       84,000        54,000       87,000
     Advertising ...........       12,000         7,000        8,000
     Rent ..................       11,000        11,000       11,000
     Supervisor's salary ...       30,000        30,000       25,000
     Property taxes ........       10,000         8,000        2,000
Net income/loss ............      <27,000>       70,000       12,000

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.

Assume ZZ, Inc. eliminated the production and sale of Product A. The
elimination of Product A resulted in a $50,000 increase in the sales
of Product B. The sales of Product C were unchanged by the decision
to eliminate Product A. 

Calculate the amount of net income ZZ, Inc. would expect to generate
in the coming year.

Answer 1

Since ZZ Inc. will eliminate product A, revised data will appear as follows:

Revenue:

Total revenue = Revenue from B + Revenue from C

= ($180,000 + $50,000) + $145,000

= $375,000

Note: There will be a sale increase of $50,000 in Product B after elimination of product A.

Costs:

Variable cost = ($230,000 * 30%)+ $87,000

= $156,000

(Existing Variable cost for product B is 30% which will be incurred on additional sales as well)

Advertising = $7,000 + $8,000 = $15,000 (Assuming Advertising expense for product A as aviodable)

Rent = $33,000 (Will be same in total)

Supervisor salary = $30,000 + $25,000 = $55,000  (Assuming Supervisor salary for product A as aviodable)

Propoert tax = $20,000 (In total, will remain same)

Total cost = $156,000 + $15,000 + $33,000+ $55,000 + $20,000

= $279,000

Net Income = Revenue - Costs

= $375,000 - $279,000

= $96,000