Questions 7 and 8 refer to the following problem: The following information is f
ID: 2463407 • Letter: Q
Question
Questions 7 and 8 refer to the following problem:
The following information is for X Company's two products, A and B:
Product A: Product B:
Revenue A)$92,000 B)$89,000
Total variable costs A)53,360 B)53,400
Total contribution margin A)$38,640 B)$35,600
Total fixed costs
Avoidable A)25,915 B)17,253
Unavoidable A)25,915 B)14,697
Profit A)$-13,190 B)$3,650
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 $37,200, but $4,800 of additional fixed costs will be incurred. This use of the vacant space will result in an increase in X Company's profits of_____________________________
Explanation / Answer
Q7 Present Profit= -13,190 + 3,650 = (9,540.00) Statement showing computations Particulars Amount Revenue 89,000.00 Total Variable Costs' 53,400.00 Total Contribution Margin = Revenue - VC 35,600.00 Total fixed Costs Avoidable 17,253.00 Unavoidable 40,612.00 Profit= Cont - FC (22,265.00) Profit will decrease by $12,725 (-9540 - (-22265) Q8 CM ratio of Product B = 35,600/89,000 0.40 VC Ratio = 53,400/89000 0.60 Revenue 126,200.00 Total Variable Costs' 75,720.00 Total Contribution Margin = Revenue - VC 50,480.00 Total fixed Costs Avoidable 22,053.00 Unavoidable 40,612.00 Profit= Cont - FC (12,185.00) Profit will decrease by $2,645 (-9540 - (-12185)
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