Question
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
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.
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