The following information is for X Company\'s two products, A and B: $31,273 of

ID: 2512876 • Letter: T

Question

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

$31,273 of Product A's fixed costs are avoidable; $16,217 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 $27,500. Accompanying the sales increase will be a fixed cost increase of $4,800. If X Company drops Product A and increases Product B sales, what will be the effect on firm profits?

Product A Product B Revenue $92,000 $89,000 Total contribution margin 38,640 36,490 Total fixed costs 56,860 27,960 Profit $-18,220 $8,530

Explanation / Answer

Contribution Margin ratio for Product A (36,490/89,000)

41%

Additional Contribution from product B sales (27,500*41%) (A)

$11,275

Add: Avoidable fixed costs for product A (B)

$31,273

Less: Additional Fixed Costs for product B (C)

($4,800)

Less: Contribution loss of product B (D)

($38,640)

Decrease in overall firms profits if product A discontinued (E=A+B-C-D)

($892)

Effect of profit is deceased by $892