The following information is for X Company\'s two products, A and B: $29,292 of

Question

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

$29,292 of Product A's fixed costs are avoidable; $15,342 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 $24,100. Accompanying the sales increase will be a fixed cost increase of $4,000. If X Company drops Product A and increases Product B sales, what will be the effect on firm profits?

Product A Product B Revenue $92,000    $88,000    Total contribution margin 38,640    36,960    Total fixed costs 56,330    25,570    Profit $-17,690    $11,390   

Explanation / Answer

Contribution Margin ratio of Product B 36960/88000 42% Additional Contribution we may get from Increase in sale of Product B 24100*42% 10122 Less: Additional Fixed Costs 4000 Add: Avoidable fixed costs for product A 29292 Less: Contribution loss of product A 38640 Decrease in firms profits 0 -3226

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