Questions 7 and 8 refer to the following information: The following information
ID: 2574784 • Letter: Q
Question
Questions 7 and 8 refer to the following information: The following information is for X Company's two products, A and B, last year: Sales Total variable costs Total fixed costs Profit Product A $87,500 52,500 29,690 $5,310 Product B $85,820 44,626 46,370 $-5,176 Because of the reported loss for Product B, X Company is considering dropping it. Further analysis reveals that $6,490 of Product A's fixed costs and $25,730 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 20554 Submit Answer Incorrect. Tries 1/5 Previous Tries 8. Assume that sales of Product A can be increased by $18,550 if Product B is dropped. What will be the effect of this increase on company profits? 13134 Submit Answer Incorrect. Tries 1/5 Previous TriesExplanation / Answer
Req 7: Differentiala Analysis: Loss of revenue of Product-B: -85820 Less: Savings in cost Variable cost of B 44626 Avoidable Fixed cost of B 20640 (46370-25730) Net decrease of Profits -20554 If X company drops Product B, company profits will change by - $20554 Req 8. CM ratio of Product A: Contribution/ Sales *100 (87500-52500)/87500*100= 40% Revised Income Sstatement of X company: Sales revenue (87500+18550) 106050 Less: variable cost @60% 63630 Contribution 42420 Less: Fixed cost of Product A 29690 Common Cost of Product B 25730 Net Operating income -13000 Initial Net income before dropping (5310-5176) 134 Net decrease in profits on dropping of Product B -13134 The effect on company's profits is - $13134 Note: In the absence of other information, the other fixed cost of Product B is regarded as Avoidable.
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