The following information is for X Company\'s two products, A and B: $13,354 of

Question

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

$13,354 of Product A's fixed costs are avoidable; $30,544 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 $27,000. Accompanying the sales increase will be a fixed costs increase of $3,600. If X Company drops Product B and increases Product A sales, what will be the effect on firm profits?

Product A Product B Revenue $92,000    $95,000    Total contribution margin 36,800    43,700    Total fixed costs 24,730    57,630    Profit $12,070    $-13,930   

Explanation / Answer

Profits from Increase of sales of Product A

Increase in the sales of Product A :   27000

(-) variable cost 60% of sales          : 16200

Increase in profits 40% of sales     :   10800

(-) additional fixed cost                       3600

profit from increased sales:                7200

Profits from the discontinuation of Product B:

Total contribution margin : 43,700   

(-) avoidable cost             : 30,544

Saving from Product B: 13156

total effects would be : profit will increase by 7200 from the increased sale of product A and saving of 13156 from product B

Total Savings : 20356

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