The following information is for X Company\'s two products, A and B: $15,215 of

Question

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

$15,215 of Product A's fixed costs are avoidable; $33,034 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 $29,600. Accompanying the sales increase will be a fixed cost increase of $4,800. If X Company drops Product B and increases Product A sales, what will be the effect on firm profits?

Product A Product B Revenue $93,000    $90,000    Total contribution margin 39,990    37,800    Total fixed costs 30,430    55,990    Profit $9,560    $-18,190   

Explanation / Answer

Contribution Margin ratio of Product A 39990/93000 43% Additional Contribution we may get from Increase in sale of Product A 29600*43% 12728 Less: Additional Fixed Costs 4800 Add: Avoidable fixed costs for product B 33034 Less: Contribution loss of product B 37800 Increase in firms profits 0 3162

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