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The Montana Consulting is evaluating the profitability of their two clients, X and Y. Total...

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Accounting

The Montana Consulting is evaluating the profitability of their two clients, X and Y. Total fixed costs are allocated evenly between customer X and Y, and will remain the same whether they add or drop clients. Should The Montana Consulting drop client Y? The profit/loss for each customer is shown below. Should client Y be dropped?

XY

Revenue 320,000 154,500

Variable costs 173,000 120,500

Contribution margin 147,000 34,000

Allocated fixed costs 65,000 65,000

Customer profit (loss) 82,000 (31,000)

A. Yes, profit will increase if Client Y is dropped.

B. No, profit will decrease if Client Y is dropped.

C. Yes, because any customer showing a loss should be dropped.

D. Yes, because their revenues are much lower than Client X.

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