8 pt The following information is for X Company\'s two products, A and B: Produc
ID: 2511430 • Letter: 8
Question
8 pt The following information is for X Company's two products, A and B: Product B $93,000 37,200 52,900 Product A Revenue Total contribution margin Total fixed costs Profit $90,000 38,700 31,020 $7,680 -15,700 $17,992 of Product A's fixed costs are avoidable; $30,682 of Product B's fixed costs are avoidable. X Company plans to drop Product B since it shows a loss and increase sales of Product A by $38,700. Accompanying the sales increase will be a fixed cost increase of $3,800. If X Company drops Product B and increases Product A sales, what will be the effect on firm profits? 7. AO 84,754 BO$6,323 COS8,410 DO si 1,185 EO s?4,876 FOs19,78sExplanation / Answer
Current Profit
= Product A + Product B
= $ 7,680 + $ - 15,700
= $ - 8,020
Except avoidable fixed costs, remaining fixed costs of ($52,900 - $30,682 = $ 22,218) cannot be avoided and have to be incurred in case of product B
Contribution margin ratio of product A
= Contribution / Sales
= $38,700 / $90,000
= 0.43 or 43%
The following table shows the calculations
New sales of product A
= Old + $38,700
= $90,000 + $38,700
= $ 128,700
New total fixed costs of product A
= Old + $3,800 + Unavoidable fixed costs of product B
= $ 31,020 + $3,800 + $22,218
= $57,038
So, the losses will decrease from $8,020 to $1,697 that is by $6,323 and so the proposal should be accepted
So, as per above calculation, option B is the correct option
Calculations Particulars Product A Product B Total A + B A Sales 128,700 - 128,700 B Contribution margin ratio 0.43 - - C = A x B Contribution 55,341 - 55,341 D Total Fixed costs 57,038 - 57,038 E = C - D Profit (1,697) - (1,697)Related Questions
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