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

Question

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

Because of the reported loss for Product A, X Company is considering dropping it. Further analysis reveals that $29,550 of Product A's fixed costs and $6,700 of Product B's fixed costs are common costs that the company allocates to the two products.
7. If X Company drops Product A, company profits will change by

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8. Assume that sales of Product B can be increased by $14,030 if Product A is dropped. What will be the effect of this increase on company profits?

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Product A     Product B Sales $94,550    $94,280    Total variable costs 52,948    55,625    Total fixed costs 78,290    31,590    Profit $-36,688    $7,065   

Explanation / Answer

Working Notes:

7)

If company drops product A, the profit will increase by $7138

8)

Working Notes:

If sales of Product B can be increased by $14,030 if Product A is dropped, the profit of the company will increase by ($8455) - ($29623) = $21168. In other words loss of the company will be reduced to $8455 from a loss of $29623

Product A Product B Total Sales $   94,550 $   94,280 Less: variable costs $   52,948 $   55,625 Contribution $   41,602 $   38,655 $   80,257 Less: Traceable fixed costs $   48,740 $   24,890 $   73,630 Operating Income $   (7,138) $   13,765 $      6,627 Less: common fixed costs $   36,250 Net operating income $ (29,623)

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