1. Prepare a differential analysis to show whether the corporation should drop the B product line. 2. Should the B product line be dropped? Explain and discuss your answer.
The management of ABC Corporation is alarmed by their operating losses. They are
considering dropping the B product line. The company accountants have prepared
the following analysis to help make this decision.
ABC Corporation
Income Statement
For the Year Ended December 31, 20XX
Total A B
Sales Revenue $930,000 $575,000 $355,000
Variable Costs 507,000 267,000 240,000
Contribution Margin 423,000 308,000 115,000
Fixed
Manufacturing
Selling and
Administrative 62,000 45,000 17,000
Total Fixed Costs 437,000 270,000 167,000
Operating Income (Loss) $(14,000) $38,000 $(52,000)
If the company stops selling the product in line B, the company will be able to avoid
80% of the fixed manufacturing costs and 100% of the fixed selling and administrative
costs.
Required:
1. Prepare a differential analysis to show whether the corporation should drop the
B product line.
2. Should the B product line be dropped? Explain and discuss your answer.
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