The following information is for X Company\'s two products, A and B, last year:
ID: 2574237 • 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 $6,310 of Product A's fixed costs and $26,450 of Product B's fixed costs are common costs that the company allocates to the two products.
7. If X Company drops Product B, company profits will change by ___?
8. Assume that sales of Product A can be increased by $16,220 if Product B is dropped. What will be the effect of this increase on company profits?
Product A Product B Sales $86,610 $91,660 Total variable costs 48,502 54,996 Total fixed costs 27,360 56,210 Profit $10,748 $-19,546Explanation / Answer
7 Contribution margin loss -38108 Avoidable fixed costs 21050 =27360-6310 Change in profit -17058 If X Company drops Product B, company profits will change by $17058 decrease 8 Contribution margin ratio = 54996/91660= 60% Increase in profits by increase in sales = 16220*60%= 9732
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