Questions 7 and 8 refer to the following problem: The following information is f

Question

Questions 7 and 8 refer to the following problem:

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

7. If X Company drops Product A because it shows a loss, what will be the effect on firm profits?

8. Assume that if X Company drops Product A, it can use the vacant space to increase sales of Product B by $29,600, but $3,800 of additional fixed costs will be incurred. This use of the vacant space will result in an increase in X Company's profits of

Product A Product B Revenue $85,000    $89,000    Total variable costs   44,200      51,620    Total contribution margin $40,800    $37,380    Total fixed costs    Avoidable 30,375    17,754       Unavoidable   22,915      14,526    Profit $-12,490    $5,100   

Explanation / Answer

7. if x company drops product A because of loss then ultimately company get profit because when company produce two products then company having a loss(-12490+5100) =7390 but when product A drops also 12490 losses are drops then company get profit

8 for secoend case compnys profit increased by(29600-3800)=$25800

because sales grown by $29600

and expenses grown by $3800

so new profit will be (25800+5100)=$30900

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