Questions 7 and 8 refer to the following information: The following information
ID: 2574586 • Letter: Q
Question
Questions 7 and 8 refer to the following information: The following information is for X Company's two products, A and B, last year: Sales Total variable costs Total fixed costs Profit Product A $87,500 52,500 29,690 $5,310 Product B $85,820 44,626 46,370 $-5,176 Because of the reported loss for Product B, X Company is considering dropping it. Further analysis reveals that 6,490 of Product A's fixed costs and $25,730 of Product B's fixed costs are common costs that the company allocates to the two products 7. If X Company drops Product B, company profits will change by Suoemit Answer Tries Submt Answer Tries o/s 8. Assume that sales of Product A can be increased by $18,550 if Product B is dropped. What will be the effect of this increase on company profits? Submit Answer Tries o/5Explanation / Answer
Answer 7.
Before Product B is dropped:
Total Profit = Profit by Product A + Profit by Product B
Total Profit = $5,310 - $5,176
Total Profit = $134
If Product B is dropped:
Profit by Product B = -$5,176
Total Fixed Costs = $46,370
Common fixed costs allocated to Product B = $25,730
Common fixed costs allocated to Product B are unavoidable costs and other costs are avoidable.
Expected Profit due to dropping of Product B = Profit of Product A - Unavoidable Fixed costs allocated to Product B
Expected Profit due to dropping of Product B = $5,310 - $25,730
Expected Profit due to dropping of Product B = -$20,420
So profit will decrease by $20,554 ($134 - (-$20,420)) if product B is dropped.
Answer 8.
Before Product B is dropped:
Total Profit = Profit by Product A + Profit by Product B
Total Profit = $5,310 - $5,176
Total Profit = $134
Product A:
Sales = $87,500
Variable Costs = $52,500
Contribution Margin = Sales - Variable Costs
Contribution Margin = $87,500 - $52,500
Contribution Margin = $35,000
Contribution Margin Ratio = $35,000 / $87,500
Contribution Margin Ratio = 0.40
If Product B is dropped:
Profit by Product B = -$5,176
Total Fixed Costs = $46,370
Common fixed costs allocated to Product B = $25,730
Common fixed costs allocated to Product B are unavoidable costs and other costs are avoidable.
Increase in Sales of Product A = $18,550
Increase in Contribution Margin = Contribution Margin Ratio * Increase in Sales
Increase in Contribution Margin = 0.40 * $18,550
Increase in Contribution Margin = $7,420
Expected Profit due to dropping of Product B = Profit of Product A - Unavoidable Fixed costs allocated to Product B + Increase in Contribution Margin
Expected Profit due to dropping of Product B = $5,310 - $25,730 + $7,420
Expected Profit due to dropping of Product B = -$13,000
So profit will decrease by $13,134 ($134 - (-$13,000)) if product B is dropped.
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