The following information is for X Company\'s two products, A and B: $26,408 of

Question

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

$26,408 of Product A's fixed costs are avoidable; $15,274 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 $32,500. Accompanying the sales increase will be a fixed cost increase of $3,600. If X Company drops Product A and increases Product B sales, what will be the effect on firm profits?

Product A Product B Revenue $89,000    $88,000    Total contribution margin 40,050    37,840    Total fixed costs 51,780    29,950    Profit $-11,730    $7,890   

Explanation / Answer

Incremental Profits of dropping Product-A: Total sales revenue of Product B (88000+32500) 120500 CM ratio (37840/88000*100) 43% Total Contribution 51815 Less: Fixed cost of Product B (29950+3600) 33550 Less: Unavoidable Fixed cost of product A 25372 Net Operating income -7107 Earlier Combined income (-11730+7890) -3840 Net decrease in income -3267

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