The following information is for X Company\'s two products, A and B, last year:
ID: 2575331 • Letter: T
Question
The following information is for X Company's two products, A and B, last year:
Because of the reported loss for Product B, X Company is considering dropping it. Further analysis reveals that $5,780 of Product A's fixed costs and $27,940 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 $-3,833
8. Assume that sales of Product A can be increased by $15,210 if Product B is dropped. What will be the effect of this increase on company profits?
I tried:
8. if sales of product A are increased by $15,210.
new sales will be ($89,390 + 15,210) =>$104,600
variable costs will be ($52,740 / 89,390) * $104,600 =>$61,714.....(rounded to nearest dollar)..
the following is the calculation of the profits:
total profit = $12,106 - $27,940 => - $15,834.
the total profit will increase by (or loss will reduce by) = > - $15,834 - (- $18,237)
=>$2,403.
If product A sales increase by $15,210 the total loss is reduced by $2,403.
And it was incorrect.
Product A Product B Sales $89,390 $86,080 Total variable costs 52,740 50,787 Total fixed costs 30,780 59,400 Profit $5,870 $-24,107Explanation / Answer
8 Contribution margin ratio for product A = (89390-52740)/89390= 41% Increase on company profits = 15210*41%= 6236 or 6236.1
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