The following information is for X Company\'s two products, A and B: 7. If X Com

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 $9,346

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

If the company X drops the product B, there will be an increase in the profit as per the table below:

Assuming that the product B is dropped

The freed capacity is the space of the product B as oer the above statement and the contribution margin has to be calculed

Description Product-A Product-B Total Revenue 87000 91000 1,78,000 Total Variable Costs 51,330 50,960 1,02,290 Total Contribution margin 35,670 40,040 75,710 Total Fixed Cost Avoidable 13,158 31,251 4,4409 Unavoidable 12,642 25,569 38,211 Profit 9,870 -16,780 -6910

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