The following information is for X Company\'s two products, A and B: $14,977 of

Question

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

$14,977 of Product A's fixed costs are avoidable; $29,675 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 $26,400. Accompanying the sales increase will be a fixed costs increase of $5,000. If X Company drops Product B and increases Product A sales, what will be the effect on firm profits?

Product A Product B Revenue $90,000    $86,000    Total contribution margin 36,900    42,140    Total fixed costs 27,230    55,990    Profit $9,670    $-13,850   

Explanation / Answer

Contribution margin on product A = 36900

Contribution ratio = 36900/90000 i.e 41%

New Sales of product A = 90000+26400 i.e 116400

New Contribution = 116400*41% i.e 47724

Fixed cost of product A = 27230

Profit = 47724-27230 i.e 20494

Loss of contribution on product B = 42140

Savings in fixed cost = 29675

Loss on dropping of product B = 55990-29675 i.e 26315

New profit of firm = 20494-26315 i.e loss of 5821

Old Profit = 9670-13850 i.e 4180

Loss will increase by 1641

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