The following information is for X Company\'s two products, A and B: $34,574 of

Question

The following information is for X Company's two products, A and B:

$34,574 of Product A's fixed costs are avoidable; $13,943 of Product B's fixed costs are avoidable. X Company plans to drop Product A since it shows a loss and increase sales of Product B by $33,500. Accompanying the sales increase will be a fixed costs increase of $4,600. If X Company drops Product A and increases Product B sales, what will be the effect on firm profits?

Product A Product B Revenue $87,000    $92,000    Total contribution margin 39,150    39,560    Total fixed costs 58,600    25,350    Profit $-19,450    $14,210   

Explanation / Answer

Details for Product B

Product A % Product B Total Revenue           87,000 100.00%          92,000 100.00%           179,000 Total contribution margin           39,150 45.00%          39,560 43.00%             78,710 Total fixed costs           58,600          25,350             83,950 Less Avoidable fixed cost         (34,574)       (13,943)           (48,517) Unavoidable fixed cost           24,026          11,407             35,433 Profit in current situation         (19,450)          14,210             (5,240) If A is stopped

Details for Product B

Amt $ % Revenue         125,500 100.00% Total contribution margin     53,965.00 43.00% Total fixed costs B           29,950 Unavoidable fixed cost A           24,026 Profit           (11.00) so if Product A is dropped , the net loss will improve from$( 5240) to $(11)

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