The following information is for X Company\'s two products, A and B: $28,520 of

Question

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

$28,520 of Product A's fixed costs are avoidable; $18,200 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 $34,000. Accompanying the sales increase will be a fixed cost increase of $4,800. If X Company drops Product A and increases Product B sales, what will be the effect on firm profits?

Product A Product B Revenue $91,000    $89,000    Total contribution margin 44,590    36,490    Total fixed costs 57,040    31,380    Profit $-12,450    $5,110   

Explanation / Answer

Effect on Profit by dropping Product A = -44590+28520= -16070 CM ratio of Product B = 36490/89000= 41% Effect on profit by increasing sales of product B = (34000*41%)-4800= $9140 Effect on firm profits if X Company drops Product A and increases Product B sales = -16070+9140= -6930 or decrease of $6930

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