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 B because it shows a loss, what will be the effect on firm profits?

8. Assume that if X Company drops Product B, it can use the vacant space to increase sales of Product A by $30,600, but $3,200 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 $87,000    $91,000    Total variable costs   51,330      50,960    Total contribution margin $35,670    $40,040    Total fixed costs    Avoidable 13,158    31,251       Unavoidable   12,642      25,569    Profit $9,870    $-16,780   

Explanation / Answer

Answer 7 Present loss = $9870-$16780 = -$6910 If company drops Product B , then company need to incurr the un avoidable cost of $25569. Hence in this senerio , there will be loss for Product A = $9870 - $25569 = -$15699 Hence Increase in firm's loss by = $15699 - $6910 = $8789 Answer 8 Calculation of profit/loss Product A In $ Revenue 117600 Less : Variable cost (59%) 69384 Contribution margin 48216 Less : Fixed cost - Aviodable 13158 - Unavoidable 38211 - Additional 3200 Profit -6353 This use of vacant space will result into a loss for Product A = -$6353 The loss reduction from present level by = $6910 - $6353 = $557

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