Clinton Company Sells Two Items,product a and Product B Required:
Prepare an Incremental Analysis to Determine the Financial Effect

Essay

Clinton 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 405 as a result.Dropping product B will allow the company to cancel its monthly equipment rental costing $100 per month.The other existing equipment will be used for additional production of product A.One employee earning $200 per month can be terminated if product B production is dropped.Clinton's other fixed costs are allocated and will continue regardless of the decision made.A condensed,budgeted monthly income statement with both products follows:
$\begin{array}{lrrr}&\text { Product } A&\text { Product } B&\text { Product } C\\\text { Sales } & \$ 10,000 & \$ 8,000 & \$ 18,000 \\\text { Direct materials } & 2,500 & 2,000 & 4,500 \\\text { Direct labor } & 2,000 & 1,200 & 3,200\\\text { Equipment rental } & 300 & 2,600 & 2,900 \\\text { Other allocated overhead } & 1,000 & 2,100 & 3,100 \\\text { Operating income } & \$ 4,200 & \$ 100 & \$ 4,300\end{array}$ Required:
Prepare an incremental analysis to determine the financial effect of dropping product B.