Question
In: Accounting
Garrett Company provided the following information: Product 1 Product 2 Units sold 10,000 20,000 Price $20 ...
Garrett Company provided the following information:
| Product 1 | Product 2 | |
| Units sold | 10,000 | 20,000 |
| Price | $20 | $15 |
| Variable cost per unit | $10 | $10 |
| Direct fixed cost | $35,000 | $75,000 |
Common fixed cost totaled $46,000. Garrett allocates common fixed cost to Product 1 and Product 2 on the basis of sales. If Product 2 is dropped, which of the following is true?
a.Sales will increase by $300,000.
b.Overall operating income will increase by $2,600.
c.Overall operating income will decrease by $25,000.
d.Overall operating income will not change.
e.Common fixed cost will decrease by $27,600.
Solutions
Expert Solution
Answer : C is True
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| Overall Income Statement | Overall Income Statement if (Product 2 is Dropped) | ||||||||
| Particulars | Product 1 | Product 2 | Overall | Product 1 | Overall | Change | Effect | Justification | |
| A | Units sold | 10,000 | 20,000 | $30,000 | 10,000 | $10,000 | ($20,000) | Decrease | |
| B | Price | $20 | $15 | $20 | |||||
| C | Sales Revenue (A*B) | $200,000 | $300,000 | $500,000 | $200,000 | $200,000 | ($300,000) | Decrease | A is False as sales will decrease |
| D | Variable cost per unit | $10 | $10 | $10 | |||||
| E | Contribution Per Unit (B-C) | $10 | $5 | $10 | |||||
| F | Total Contribution (E*A) | $100,000 | $100,000 | $100,000 | |||||
| G | Direct fixed cost | $35,000 | $75,000 | $110,000 | $35,000 | $35,000 | ($75,000) | Decrease | |
| H | Common Fixed Cost based on Sales 1:2 | $15,333 | $30,667 | $46,000 | $46,000 | $46,000 | $0 | No Change | D is false as common fixed cost will not change |
| I | (46000*10000/30000) | (46000*20000/30000) | (46000*10000/30000) | ||||||
| J | Income (E-F-G) | $49,667 | ($5,667) | $44,000 | $19,000 | $19,000 | ($25,000) | Decrease | C is True as there is an decrease in overall income and B & D are false |
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