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StormLrd StormLrd
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4 years ago
Clinton 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 $100 per month. The other existing equipment will be used for additional production of product A. One employee earning $200 per month can be terminated if product B production is dropped. Clinton'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 labour   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.
Textbook 

Cost Accounting: A Managerial Emphasis, Canadian Edition


Edition: 7th
Authors:
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pachopacho
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4 years ago
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More questions for this book are available here
Incremental change in revenue:
   Product A increase in sales $10,000 × 40%    $4,000
   Product B decrease in sales   (8,000)
Incremental decrease in revenue      ($4,000)

Incremental change in variable costs:
Direct materials:   Product A increase $2,500 × 40%   $(1,000)
   Product B decrease    2,000
Direct labour :   Product A increase $2,000 × 40%   (800)
   Product B decrease   200
Incremental decrease in variable costs       $400
Equipment rental deduction      100
Incremental decrease in profits if product B is dropped      ($3,500)
This verified answer contains over 120 words.
1
-Michigan State University

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