The following information is for X Company\'s two products, A and B: $32,298 of

Question

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

$32,298 of Product A's fixed costs are avoidable; $13,769 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 $35,800. 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?

Product A Product B Revenue $86,000    $85,000    Total contribution margin 37,840    36,550    Total fixed costs 53,830    25,980    Profit $-15,990    $10,570   

Explanation / Answer

Contribution Margin ratio of Product B 36550/85000 43% Additional Contribution we may get from Increase in sale of Product B 35800*43% 15394 Less: Additional Fixed Costs 4200 Add: Avoidable fixed costs for product A 32298 Less: Contribution loss of product A 37840 Increase in firms profits 0 5652

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