Bo Company sells two products, Product A and Product M, for a per unit price of
ID: 2347772 • Letter: B
Question
Bo Company sells two products, Product A and Product M, for a per unit price of $10 and $12, respectively, and with variable costs of $2 and $8, respectively. Annual fixed costs required for the two products total $90,000. 10,000 units of product A and 5,000 units of product B were sold during 1999. Bo’s managers ask two questions about Product A and Product M: (1) Were both products profitable during 1999?, and (2) should either product be discontinued ?Prepare an income statement for the two products; interpret the terms used in the income statement, and use the income statement to answer the questions asked by Bo’s managers.
Explanation / Answer
Product A
Product M
Total
Price Per Unit
$10
$12
Variable Cost Per Unit
($2)
($8)
Contribution Margin
$8
$4
Unit Volume
10,000
5,000
15,000
Joint Revenue
$80,000
$20,000
$100,000
Fixed Costs
($90,000)
EBITDA
$10,000
This is an income statement in the joint-product contribution margin format. A regular income statement would instead separate the costs between product and period costs, but this is easiest for seeing exactly where costs are.
Because the Price per unit is greater than the variable cost per unit for both products, both are technically profitable. Neither product should be discontinued.
Product A
Product M
Total
Price Per Unit
$10
$12
Variable Cost Per Unit
($2)
($8)
Contribution Margin
$8
$4
Unit Volume
10,000
5,000
15,000
Joint Revenue
$80,000
$20,000
$100,000
Fixed Costs
($90,000)
EBITDA
$10,000