Biden Company sells two items, product A and product B. The ...

[audragclark]

Biden Company sells two items, product A and product B.  The company is considering dropping product B.  It is expected that sales of product A will increase by 40% as a result.  Dropping product B will allow the company to cancel its monthly equipment rental costing $200 per month.  The other existing equipment will be used for additional production of product A.  One employee earning $500 per month can be terminated if product B production is dropped.  Biden's other fixed costs are allocated and will continue regardless of the decision made.  A condensed, budgeted monthly income statement with both products follows:

​

Product A

Product B

Total

Sales

$10,000

$ 8,000

$18,000

Direct materials

2,500

2,000

4,500

Direct labor

2,000

1,200

3,200

Equipment rental

300

2,600

2,900

Other allocated overhead

1,000

2,100

3,100

Operating income

$4,200

$   100

$ 4,300

Required:
Prepare an incremental analysis to determine the financial effect of dropping product B.

[s.meritte]

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