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The following income statement is for X Company's two products, A and B: Product A   Product...

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

Product A   Product B  
Revenue $93,000    $93,000   
Total variable costs   51,150      53,010   
Total contribution margin $41,850    $39,990   
Total fixed costs
   Avoidable 27,397    14,623   
   Unavoidable   26,323      12,457   
Profit $-11,870    $12,910   



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 $26,700, with $4,400 of additional fixed costs, what will be the effect on firm profits?

Business   Accounting   
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Answer #1
Contribution margin for Product B 0.43 (39990/93000)
Increase in sale of Product B $26,700
Computation of effect on profits on dropping A
Savings of avoidable fixed cost by dropping product A $27,397
Add: Increase in contribution of Product B $11,481 (26700*0.43)
Less: Loss in contribution from droping product A ($41,850)
Less: Increase in fixed costs ($4,400)
Decrease in Profit on dropping Product A ($7,372) Answer
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