The management of ABC Corporation is alarmed by their operating losses. They are considering dropping the B product line. The company accountants have prepared the following analysis to help make this decision.

When you keep selling you will have a loss of $14000

And when you do not sell Product B you will have a profit of $ 8000.

So It is advisable to drop Product B.

Explanation:

ABC Corporation

Income Statement

                                 Total           A              B

Sales                      930,000   575,000       355,000

Variable Costs      507,000267,000               240,000

Contribution Margin 423,000308,000                115,000

Fixed Costs  

Manufacturing  375,000         225,000      150,000

Selling & Administrative

                             62,000          45000             17000

Total F. Costs437,000        270,000           167,000

Opertng Income (loss)(14000)38,000           (52,000)

ABC Corporation

Differential Analysis

          Keep SellingDoes Not            Difference

                                                Keep Selling               Variances

Sales         930,000            575,000               (355,000)

Var. Costs       507,000  267,000                240,000

C. M                423,000         308,000                        (115,000)

Fixed Costs  

Manufacturing 375,000   255,000                 120,000  

Selling &

Administrative  62,000           45000                         17000

Total F. Cost    437,000   300,000                137,000

Oprting. P (loss) (14000)     8,000                       (22,000)

We see that when the company is selling Product B it has a loss of $ 14000 and when it does not sell Product B it has a profit of $ 8000. Therefore it is advisable to stop selling product B. If we look at the variances the Sales revenue decreases by $ 355,000 and so do the variable costs by $ 240,000.There is a decrease in the Contribution Margin but there is an increase in the net income so the Product B must not be sold.