Reference no: EM132515726

Eliminating operations - Capital Toys' management is considering eliminating product A, which has been showing a loss for several years. The company's annual income statement, in $000s, is as follows:

                                                              A                     B                   C                       Total

Sales revenue                                          $2,200           $1,400            $1,800           $5,400
Variable expenses                                      1,650               600                 1,080          3,330
Contribution margin                                     $ 550               $ 800               $ 720          $2,070
Advertisinga expense                                  $ 500                $ 475                 $ 520        $1,495
Depreciation expense                                    15                   10                         20           45          
Corporate expenses                                       90                   80                        105           275              
Total fixed expenses                                      $ 605                    $ 565             $ 645         $1,815
Operating income                                      $ (55)                          $ 235           $ 75           $ 255

1. Specific to each product.
2. Specific to each product; no other use available, no resale value.
3. Allocated based on number of employees.

Required

Question 1: What would be the effect on income if product A were dropped?