8 pt The following information is for X Company\'s two products, A and B: Produc

Question

8 pt The following information is for X Company's two products, A and B: Product A Product B Revenue Total contribution margin Total fixed costs Profit $93,000 41,850 58,750 8-16,900 $87,000 36,540 30,540 $6,000 $29,375 of Product A's fixed costs are avoidable; $16,492 of Product B's fixed costs are avoidable. X Company plans to drop Product A since it shows a loss and increase sales of Product B by $24,800. Accompanying the sales increase will be a fixed cost increase of $4,200. If X Company drops Product A and increases Product B sales, what will be the effect on firm profits? 7. AO $-4,338 BO s-4,902 ?? s-5,539 DO $6,259 E08-7,073 F08-7,992 8ptX Company currently makes 7,000 units of a component part each year, but is considering buying it from a supplier for 7.70 each. The current annual cost of making the part is $58,300. The supplier wants X Company to sign a contract for the next six years. If X Company buys the part, it will be able to sell the equipment that it currently uses to make the part for $18,000, but the equipment will have no salvage value at the end of six years. Assuming a discount rate of 3%, what is the net present value of buying the part instead of making it? AO $17782 BO823.650 CO s31 ,455 DO s41,835 EO$55640 FOs74,002 8.

Explanation / Answer

Answer is D. -6259 Explanation: Explanation: CM ratio of product-B: (36540/87000*100)= 42% Incrementlal analysis of income: Total sales of Product-Bb (87000+24800) 111800 CM ratio 42% Contribbution 46956 Less: Fixed cost of Product B 34740 Less: Unavoidable fixed cost of Product A 29375 (58750-29375) Net Loss from Operations -17159 Earlier combined loss (-16900+6000) -10900 Net decrease in income -6259 Answer is D. $41835 Explanation: Nnet Annual saving in buying: Cost of Manufacturing 58300 Cost of buying (7000 units @7.70) 53900 Net saving 4400 Annuitty factor for 6 years at 3% 5.4172 Present value of savings 23835.68 Add: Equipment realised 18000 Net Present value 41835.68

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