The following information is for X Company\'s two products, A and B: 7. If X Com
ID: 2462981 • Letter: T
Question
The following information is for X Company's two products, A and B:
7. If X Company drops Product B because it shows a loss, what will be the effect on firm profits?
8. Assume that if X Company drops Product B, it can use the vacant space to increase sales of Product A by $29,400, but $4,200 of additional fixed costs will be incurred. This use of the vacant space will result in an increase in X Company's profits of:________?
Product A Product B Revenue $86,000 $92,000 Total variable costs 49,020 50,600 Total contribution margin $36,980 $41,400 Total fixed costs Avoidable 16,295 25,545 Unavoidable 16,295 25,545 Profit $4,390 $-9,690Explanation / Answer
Ans.
7. If company drops B then the effect on firm profits would be the profit would reduce by -$15,855 ( 25,545 - 41,400)
It is calculated below :
If company drops B then the company has to bear the Unavoidable fixed cost which is $25,545 and contribution is $41,400 and the difference of both i.e. -$15,855 ( 25,545 - 41,400) would affect the profit.
BUT SEE ANOTHER ASPECT OF THE QUESTION ALSO:
If company drops the product B then there would be no sale from product B and no variable cost from it and hence no contribution from it
BUT ONLY THE UNAVOIDABLE FIXED COST WIIL REMAIN AND AFFECT THE PROFIT OF THE COMPANY BY THE SAME AMOUNT i.e. 25,545
8. Decrease in X company's profit by $345 (4,390-4,045) the answer $345 can also be writtern -$345 as it is decreasing.
Explaination given below :
Now the profit of X company = $4,045
The profit before = 4,390
Difference decrease in profit = $345 (4,390-4,045)
it can also be writtern in negative sign as it is decreasing profit from 4,390 to 4,045 hence it can be written -345 also.
Particulars Product A Revenue plus incresed by $29,400 115,400 (86,000+29,400) Less : Total variable costs (49,020) Total contribution Margin 66,380 Less : Total fixed cost : - Avoidable (16,295) - Unavoidable Cost of (Product A + Product B) i.e. (16,295+ 25,545) (41,840) - Additional fixed cost incresed (4,200) Profit 4,045Related Questions
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