McCollum Company manufactures two products. Both products have the same sales price, and the volume of sales is equivalent. However, due to the difference in production processes, Product A has higher variable costs and Product B has higher fixed costs. Management is considering dropping Product B because that product line has an operating loss.
MCCOLLUM COMPANY
Income Statement
Month Ended June 30, 2018
Total Product A Product B
Net Sales Revenue \(150,000 \)75,000 \(75,000
Variable Costs 90,000 55,000 35,000
Contribution Margin 60,000 20,000 40,000
Fixed Costs 50,000 5,000 45,000
Operating Income/(Loss) \)10,000 \(15,000 \)(5,000)
- If fixed costs cannot be avoided, should McCollum drop Product B? Why or why not?
- If 50% of Product Bโs fixed costs are avoidable, should McCollum drop Product B? Why or why not?