he following information is for X Company\'s two products, A and B: $14,378 of P

Question

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

$14,378 of Product A's fixed costs are avoidable; $27,321 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 $34,700. Accompanying the sales increase will be a fixed costs increase of $3,800. If X Company drops Product B and increases Product A sales, what will be the effect on firm profits?

Revenue Total contribution margin Total fixed costs Profit Product A $90,000 36,000 24,790 Product B $95,000 45,600 52,540 $-6,940 $11,210

Explanation / Answer

Contribution ratio of Product A = 36000/90000 i.e 40%

Contribution after additional sales = ( 90000+34700)*0.40 i.e 49880

Fixed cost after additional sales = 24790+3800 i.e 20990

Net profit after additional sales = 49880-20990 i.e 28890

Non avoidable fixed cost of product B = 52540-27321 i.e 25219

Profit of the firm after additional sales = 28890-25219 i.e 3671

Profit of the firm before additional sales = 11210-6940 i.e 4270

Profit will reduce by = 4270-3671 i.e 600

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