The following information is for X Company\'s two products, A and B: 7. If X Com
ID: 2463492 • Letter: T
Question
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
Explanation / Answer
Answer:
The overall profit of firm (before dropping Product B) = $9,870 + (-$16,780) = -$6,910
Company is in loss of $6,910 due to huge loss from Product B.
7.
If Product B is dropped, Company will earn full profit from Product A $9,870 + Avoidable Fixed Cost of Product B can be avoided by dropping Product B – Unavoidable Fixed Cost which will continue to incur associated with Product B
The overall profit of company will be = $9,870 + $31,251 - $25,569 = $15,552
THIS IS THE OVERALL EFFECT ON FIRM'S PROFIT ----- If X Company drops Product B, the OVERALL Profit to the Company will be $15,552 ($9,870 + $5,682)
If X Company drops Product B, the effect on firm's profit will be ===== firms profit will be increased by $5,682
8.
Calculation of Incremental Profit from the use of vacant space by dropping Product B
Increase in Sales
$30,600
Less: Variable Cost (59% of Sales)
($18,054)
Contribution Margin
$12,546
Less: Additional Fixed Cost
($3,200)
Net Benefit
$9,346
The use of the vacant space will result in an increase in X Company’s profits of $9,346
Increase in Sales
$30,600
Less: Variable Cost (59% of Sales)
($18,054)
Contribution Margin
$12,546
Less: Additional Fixed Cost
($3,200)
Net Benefit
$9,346
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