The following income statement is for X Company's two products, A and B: Product A Product B Revenue $93,000 $92,000 Total variable costs 52,080 52,440 Total contribution margin $40,920 $39,560 Total fixed costs Avoidable 28,480 16,296 Unavoidable 24,260 11,324 Profit $-11,820 $11,940 If X Company drops Product A because it shows a loss and is able to use the vacant space to increase sales of Product B by $35,900, with $5,000 of additional fixed costs, what will be the effect on firm profits?
· Correct Answer = Profits will Decrease by $ 2003 [Answer: $ - 2003]
|
A |
Contribution margin of 'B' |
$39,560 |
|
B |
Revenue of 'B' |
$92,000 |
|
C = A/B |
CM Ratio |
43% |
|
D |
Additional sale of 'B' |
$35,900 |
|
E = C x D |
Additional contribution margin of 'B' |
$15,437 |
|
F |
Additional Fixed cost of 'B' |
$5,000 |
|
G |
Loss on Contribution margin of 'A' |
$40,920 |
|
H |
Avoidable Fixed Cost of 'A' |
$28,480 |
|
I = E-F-G+H |
Profit will Increase (Decrease) by |
($2,003) |
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