8 pt The following information is for X Company\'s two products, A and B Revenue

Question

8 pt The following information is for X Company's two products, A and B Revenue Total contribution margin Total fixed costs Profit Product A Product B $93,000 40,920 24,410 8-16,350 $16,510 $94,000 41,360 57,710 $30,586 of Product A's fixed costs are avoidable; $14,646 of Product B's fixed costs are avoidable. X Company plans to drop Product A since it shows a loss and increase sales of Product B by $25,300. Accompanying the sales increase will be a fixed cost increase of $4,400. If X Company drops Product A and increases Product B sales, what will be the effecet on firm profts? AO $1,292 B? $1,718 CO S-2285 DO $3.039 E08-4.042 FO$5,375 7.

Explanation / Answer

Total fixed costs = Unavoidable fixed costs of product A + Product B fixed costs + Increase in fixed cost

= (57,710 - 30,586) + 24,410 + 4,400

= 55,934

Product B contribution margin ratio = Contribution margin / revenue

= 40,920 / 93,000

= 44%

Increased in revenues for Product B = 93,000 + 25,300 = 118,300

Contribution margin = 118,300 * 44% = 52,052

Profit = Contribution margin - Fixed costs

= 52,052 - 55,934

= (3,882)

Profit before dropping Product A = 16,510 - 16,350 = 160

Effect on firm = 160 + 3,882 = 4,042

Profits decreased by 4,042

The answer is E

  

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