The following information is for X Company\'s two products, A and B, last year:
ID: 2787852 • Letter: T
Question
The following information is for X Company's two products, A and B, last year: Sales Total variable costs Total fixed costs Profit ProductA $92,490 47,170 62,490 Product B $85,320 48,632 28,790 $7,898 $-17,170 Because of the reported loss for Product A, X Company is considering dropping it. Further analysis reveals that $27,940 of Product A's fixed costs and $6,090 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 Submit Answer Incorrect. Tries 3/5 Previous Tries 8. Assume that sales of Product B can be increased by $14,540 if Product A is dropped. What will be the effect of this increase on company profits? Submit Answer Incorrect. Tries 3/5 Previous TriesExplanation / Answer
Product A Product B Total Sales $ 92,490.00 $ 85,320.00 $ 177,810.00 Less: Variable Expenses $ 47,170.00 $ 48,632.00 $ 95,802.00 Contribution Margin $ 45,320.00 $ 36,688.00 $ 82,008.00 Less: Direct Fixed Expenses $ 34,550.00 $ 22,700.00 $ 57,250.00 Segment Margin $ 10,770.00 $ 13,988.00 $ 24,758.00 Less: Common Fixed Expenses $ 27,940.00 $ 6,090.00 $ 34,030.00 Operating Income/Loss $ (17,170.00) $ 7,898.00 $ (9,272.00) Drop Product A Decision Product A Product B Total Sales $ - $ 85,320.00 $ 85,320.00 Variable Expenses $ - $ 48,632.00 $ 48,632.00 Contribution Margin $ - $ 36,688.00 $ 36,688.00 Direct Fixed Expenses $ 34,550.00 $ 22,700.00 $ 57,250.00 Segment Margin $ (34,550.00) $ 13,988.00 $ (20,562.00) Less : common fixed expenes $ 27,940.00 $ 6,090.00 $ 34,030.00 Operating Income/Loss $ (62,490.00) $ 7,898.00 $ (54,592.00) Direct Fixed Cost: Direct Fixed cost directly relates to particular segment & it cannot be avoided even product line is discontinue. Common Fixed Cost: Common fixed cost are allocated to segements,this cost can be allocated to other segment if any segment will be discontinue . So no direct and common fixed cost can be avoided if any product line will be discontinue. In this case if A produt line will be discontinue loss wiil be increased because contribution margin of A will be foregone. Product A has positive contribution margin and it will cover some portion of fixed cost. Loss will be increase by the amount of contribution margin foregone=$45320 Drop A Product Line & increase Sales of Prodcut B Product A Product B Total Sales $ 99,860.00 $ 99,860.00 Variable Expenses=48632*(99860/85320) $ 56,919.73 $ 56,919.73 Contribution Margin $ 42,940.27 $ 42,940.27 Direct Fixed Expenses $ 34,550.00 $ 22,700.00 $ 57,250.00 Segment Margin $ (34,550.00) $ 20,240.27 $ (14,309.73) Less: Common fixed expenses $ (27,940.00) $ (6,090.00) $ 34,030.00 Operating Income /Loss $ (62,490.00) $ 14,150.27 $ (48,339.73) Operating Profit will be increased by the amount of Increase sales of product B Increase Contribution Margin of Product B $ 6,252.27 Loss of dicontinue of product line A $ (54,592.00) Operating Loss $ (48,339.73)
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