Question

ZZ, Inc. sells three products. Income statements for the three products for the most recent year appear below: Product A Product B Product C Sales revenue ............. $120,000 $180,000 $145,000 Costs: Variable costs ........ 84,000 54,000 87,000 Advertising ........... 12,000 7,000 8,000 Rent .................. 11,000 11,000 11,000 Supervisor's salary ... 30,000 30,000 25,000 Property taxes ........ 10,000 8,000 2,000 Net income/loss ............ <27,000> 70,000 12,000 The rent is allocated to the three products equally and the property taxes are allocated based on the square footage each product uses in the factory. Assume ZZ, Inc. eliminated the production and sale of Product A. The elimination of Product A resulted in a $50,000 increase in the sales of Product B. The sales of Product C were unchanged by the decision to eliminate Product A. Calculate the amount of net income ZZ, Inc. would expect to generate in the coming year.

Answer 1

Income Statement (Revised)
Description	Product A	Product B	Product C	Calculation for B
	$	$	$
Sales Revenue	-	230,000	145,000	=180000+50000
Variable Cost	-	69,000	87,000	=54000/180000*230000
Advertising	-	7,000	8,000	No Change
Rent	-	16,500	16,500	=33000/2
Supervisor's Salary	-	30,000	25,000	No Change
Property Tax	-	16,000	4,000	=(10000+8000+2000)/(8000+2000)*8000
Profit	-	91,500	4,500
Total Profit = 91500+ 4500
	=$96,000