The following information is for X Company\'s two products, A and B: Product A P
ID: 2511616 • Letter: T
Question
The following information is for X Company's two products, A and B: Product A Product B Revenue $93,000 $90,000 Total contribution margin 39,990 41,400 Total fixed costs 25,750 57,620 Profit $14,240 $-16,220 $13,648 of Product A's fixed costs are avoidable; $29,962 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 $34,800. Accompanying the sales increase will be a fixed cost increase of $5,000. If X Company drops Product B and increases Product A sales, what will be the effect on firm profits?
Explanation / Answer
Current Profit
= Product A + Product B
= $14,240 + $ - 16,220
= $ - 1,980
Except avoidable fixed costs, remaining fixed costs of ($57,620 - $29,962 = $ 27,658) cannot be avoided and have to be incurred in case of product B
Contribution margin ratio of product A
= Contribution / Sales
= $39,990 / $93,000
= 0.43 or 43%
The following table shows the calculations
New sales of product A
= Old + $34,800
= $93,000 + $34,800
= $ 127,800
New total fixed costs of product A
= Old + $5,000 + Unavoidable fixed costs of product B
= $ 25,750 + $5,000 + $27,658
= $58,408
So, the losses will increase from $1,980 to $3,454 and so the proposal should not be accepted
Calculations Particulars Product A Product B Total A + B A Sales 127,800 - 127,800 B Contribution margin ratio 0.43 - - C = A x B Contribution 54,954 - 54,954 D Total Fixed costs 58,408 - 58,408 E = C - D Profit (3,454) - (3,454)Related Questions
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