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.

ABC Corporation

Income Statement

For the Year Ended December 31, 20XX

Total A B

Sales Revenue $930,000 $575,000 $355,000

Variable Costs 507,000 267,000 240,000

Contribution Margin 423,000 308,000 115,000

Fixed Costs:

Manufacturing 375,000 225,000 150,000

Selling and

Administrative 62,000 45,000 17,000

Total Fixed Costs 437,000 270,000 167,000

Operating Income (Loss) $(14,000) $38,000 $(52,000)

If the company stops selling the product in line B, the company will be able to avoid

80% of the fixed manufacturing costs and 100% of the fixed selling and administrative

costs.

Required:

1. Prepare differential analysis to show whether the corporation should drop the

B product line.

2. Should the B product line be dropped? Explain and discuss your answer