Question

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.

Answer 1

Answer : C is True

Try opening the Image or find the solution below

	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