The following information is for X Company\'s two products - A and B: $23,862 of

Question

The following information is for X Company's two products - A and B: $23,862 of Product A's fixed costs are directly related to Product A and avoidable: $44,874 of Product B's fixed costs are directly related to Product B and avoidable. The remaining fixed costs are allocated costs and unavoidable. X Company is considering dropping Product B. If it does, it can use the freed-up resources to increase sales of Product A by $18,700. If X Company drops Product B and increases Product A sales, firm profits will change by

Explanation / Answer

Unavoidable Fixed costs = (29100 + 55400) - (23862 + 44874) = 15764 Margin on Increased in Sales = 18700 x 0.41 = $7667 Total Profit = (35670 + 7667 + 44874) - 15764 - 23862 = $48585 Profit on A if Product B not dropped = 35670 - 29100 = $6570 Hence Profit changes by (48585 - 6570) = $42015

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