Question

Brevard Industries produces two products. Information about the products is as follows: Product 1 Product 2 Units produced and sold 5,950 12,000 Selling price per unit$16 $14 Variable costs per unit 10 9 The company's fixed costs totaled $90,000, of which $17,000 can be directly traced to Product 1 and $42,000 can be directly traced to Product 2. The effect on the firm's profits if Product 2 is dropped would be a:

Answer 1

Answer:

New Profit excluding product 2=-$18,000 (-ve sign shows decrease in profit)

Actually company profit was decreased by $18,000  by excluding product 2

Explanation:

                                         Product 1                                          Product 2

Units                                      5,950                                             12,000

Selling Price per unit            $16                                                 $14

Variable cost per unit           $10                                                 $9

Fixed Cost                             $17,000                                          $42,000

Profit on units                       ($16-$10)=$6                           ($14-$9)=$5

Current Profit Including both products:

Current Profit=[(5950*6)+(12000*5)]-90000

Current Profit=$5,700

Profit of only Product 1:

Profit=(5950*6)-(90000-42000)=-$12,300

New Profit excluding product 2= Profit of only Product 1 - Current Profit

New Profit excluding product 2=-12,300-$5,700

New Profit excluding product 2=-$18,000 (-ve sign shows decrease in profit)

Actually company profit was decreased by $18,000  by excluding product 2