The following information is for X Company\'s two products A and B: Product Prod

Question

The following information is for X Company's two products A and B: Product Product Revenue Variable costs S91,000 895,000 54.000 55.100 Tota contribution S36,400 39,900 marg Fixed coste Profit 27,590 50,360 8,810 10,460 83,587 of Product A's fixed costs are common costs that are allocated toroduct A; 10?072 of Product B,s fixed costs are common and allocated to Prduct B. The remaining fixed costs are directly related to A and B S. If X Company drops Produ B and does noth- ing with the frood-up rosources, profits will change by Tries 0/3 9. Assume that if X Company drops Product B, it can use the freed-up resources to increase sales of Product A by $16,700, but there will be additional fixed costs of $2,200. As a result, X Company's profits will increase by ries 0/3

Explanation / Answer

8. Unallocated Fixed cost of product B = $ 50,360 - $ 10,072 = $ 40,288

Contribution margin of Product B = $ 39,900

Increase in profit = Fixed cost of B - Contribution of B = $ 40,288 - $ 39,900 = $388

9.Increase in sales = 16700

Proportinal increase in variable cost = Increased Sales * (variable cost / slaes) = $ 16,700*($ 54,600/$ 91,000) = $10,020

Increase Fixed costs = $ 2,200

Profit =Sales - variable cost - fixed cost = $ 16,700 - $ 10,020 - $ 2,200 = $ 4,480

Total increase in profits = $ 4,480(profit from increase sale) + $ 388( Increase in profit form discountinuing product B = $ 4,868

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