Question

A company currently has two product lines and is considering dropping

Answer 1

Answer:

Product XYZ should not be dropped. Because it is bringing a profit contribution of $5,000 towards fixed costs.

Explanation:

Calculating the Profit Contribution of Product XYZ

Sales revenue                                                                           $60,000

Less Cost of Goods Sold                                                        ($40,000)

Contribution Margin                                                                 $20,000

Less Traceable Fixed Costs  ($30,000 - $15,000)                ($15,000)

Profit Contribution                                                                      $5,000

Hint : Remove the fixed cost element centrally controlled from Product XYZ fixed costs.

Since Product XYZ is bringing a profit contribution of $5,000 towards the fixed costs, it should not be dropped.