The following information is for X Company\'s two products, A and B, last year:
ID: 2574027 • Letter: T
Question
The following information is for X Company's two products, A and B, last year:
Because of the reported loss for Product B, X Company is considering dropping it. Further analysis reveals that $7,880 of Product A's fixed costs and $28,440 of Product B's fixed costs are common costs that the company allocates to the two products.
1. If X Company drops Product B, company profits will change by______?
2. Assume that sales of Product A can be increased by $15,410 if Product B is dropped. What will be the effect of this increase on company profits?
Product A Product B Sales $ 93,960 $ 89,110 Total variable cost 55,436 48,119 Total fixed costs 32,000 69,760 Profit $ 6,524 $-28769Explanation / Answer
1 Lost contribution margin -40991 =89110-48119 Avoidable fixed costs 41320 =69760-28440 Change in profits 329 Company profits will increase by $329 2 Contribution margin ratio for product A =(93960-55436)/93960= 41.00% Increase on company profits = 15410*41%= 6318
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