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Sprint LTE 19% 10:45 PM s4.lite.msu.edu Course Contents »... » SECOND CHANCE Timer Notes Evaluate Feedback PrintInfo The following information is for X Company's two products, A and B: Product product B Revenue $85,000 $89,000 Total contribution 37,400 margin Total fixed28,350 costs Profit 40,050 56,800 $9,050 $-16,750 $17,010 of Product A's fixed costs are avoidable; $28,400 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 $30,000 Accompanying the sales increase will be a fixed cost increase of $3,400. If X Company drops Product B and increases Product A sales, what will be the effect on firm profits? 9800 Submit AnswerIncorrect. Tries 2/3 Previous Tries Communication Blocked Send Feedback

Explanation / Answer

Current firm Profit : 9050+(-16750)

                = 9050 - 16750

               = $ - 7700

contribution margin ratio =contribution /revenue

               = 37400/85000

              = .44 or 44%

Dropping of product B will result in increasing firm loss from 7700 to 9650 .so overall firm profit will decrease by 9650 -7700 = - 1950

A B Total revenue 85000+30000=115000 0 contribution margin [A] 115000*.44= 50600 0 lesS:fixed cost [B] ((31850)        [28350+3400) ((28400)    [56800-28400] Profit [A-B] 18750 (28400) Firm profit after dropping of product B = 18750 -28400 = 9650

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