The following information is for X Company\'s two products, A and B: 7. If X Com
ID: 2463689 • 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 $35,100, but $3,200 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 $92,000 $94,000 Total variable costs 52,440 53,580 Total contribution margin $39,560 $40,420 Total fixed costs Avoidable 18,986 33,942 Unavoidable 13,194 22,628 Profit $7,380 $-16,150Explanation / Answer
7)At present the firm overall profit = 7380 - 16150 = - 8770 loss
If product B is dropped :Overall profit = Income from A +income from B
= 7380 - 22628.
= -15248 loss
**No contribution fromB if dropped ,so unavoidable cost will result in loss
The firm loss will increased by (15248- 8770) = 6478
8) Contributuion margin ratio for A = 39560 / 92000 = .43
New sales = 92000 + 35100 = 127100
Increased contribution = 127100 * 43 = 54653
Less:Fixed cost (35380) [18986+13194+3200]
Income from A = 19273
Overall income of X = 19273 - 22628 = 3355
Profit is increased by = 8770 -3355 = 5415
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