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: Product Product Revenue Total variable costs Total contribution $35,600 $43,240 margin Total fixed costs $89,000 $92,000 -53.400-48.760 Avoidable 15,475 28,661 Unavoidable_14,285 23,449 $5,840 $-8,870 Profit 7. If X Company drops Product B because it shows a loss, what will be the effect on firm profits? 17,609 Submit AnswerIncorrect. Tries 1/3 Previous Tries 8. Assume that if X Company drops Product B, it can use the vacant space to increase sales of Product A by $29,900, but $3,000 of additional fixed costs will be incurred. This use of the vacant space will result in an increase in X Company's profits of -8,649 Submit AnswerIncorrect. Tries 1/3 Previous Tries

Explanation / Answer

7) Before droping product B, the company's net profit was $3030. On drop of the Product B, the net profit of the company decrease by $14579 i.e. +$3030 to -$17609. Because Profit of product A $5840 - unavoidable fixed cost of Product B i.e.$23449 = -17609

8) By the use of the space the increase in the sales of the Product A = $29900 with increase in fixed cost of $3000. The increase in the contribution = 29900 * 40% = $11960 and increase in the net profit = $11960 - 3000 = $8960.

Equipment used in the product B is sold out at $16000 and there is a saving of $13200 for the period of 7 years. The Present value at discount rate of 4% of the dropping the Product B = -16000 + 13200 * PVIFA(4%,7) = -16000 + 13200 * 6.002 = $63226.40

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