3. Biden Company sells two items, product A and product B. The company is considering dropping product B. It is expected that sales of product A will increase by 40% as a result. Dropping product B will allow the company to cancel its monthly equipment rental costing $200 per month. The other existing equipment will be used for additional production of product A. One employee earning $500 per month can be terminated if product B production is dropped. Biden's other fixed costs are allocated and will continue regardless of the decision made. A condensed, budgeted monthly income statement with both products follows:

Product A Product B Total

Sales $10,000 $ 8,000 $18,000

Direct materials 2,500 2,000 4,500

Direct labor 2,000 1,200 3,200

Equipment rental 300 2,600 2,900

Other allocated overhead 1,000 2,100 3,100

Operating income $4,200 $ 100 $ 4,300

Required:

Prepare an incremental analysis to determine the financial effect of dropping product B.