Question

Revenue from product Y is $6,000, variable costs are $4,000, and allocated fixed costs are $3,000. If you drop product Y in the long term, profit will:_____.a. increase by $2,000.b. increase by $1,000.c. decrease by $3,500.d. decrease by $100.e. decrease by $2,000.

Answer 1

Answer:

e. decrease by $2,000.

Explanation:

The computation of the profit is shown below:

Contribution margin = Sales revenue from product Y - variable cost

= $6,000 - $4,000

= $2,000

Since there is a contribution margin of $2,000 that absorbs the allocated fixed cost till $2,000 so in the case when the product is discontinued it falls the profit by $2,000

hence, the correct option is e.