Reference no: EM13142903

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 40% 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:

• 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.