Question

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

			Product A	Product B
Revenue			$94,000	$85,000
Total variable costs			54,520	49,300
Total contribution margin			$39,480	$35,700
Total fixed costs
Avoidable			28,280	13,904
Unavoidable			27,170	11,376
Profit			$-15,970	$10,420

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 $29,700, with $3,600 of additional fixed costs, what will be the effect on firm profits?

Answer 1

Answer-----------Net income will decrease by $2326 or say Loss will increase by $2326

Working

	Product A	Product B	TOTAL
Revenue		$114,700.00	$ 114,700.00
Total variable costs		$ 66,526.00	$    66,526.00
Total contribution margin	$            -	$ 48,174.00	$    48,174.00
Total fixed costs
Avoidable		$ 17,504.00	$    17,504.00
Unavoidable	$ 27,170.00	$ 11,376.00	$    38,546.00
Profit	$(27,170.00)	$ 19,294.00	-$      7,876.00

.

Net Total Income (loss) Before discontinuing Product A	$   (5,550.00)
Net Total Income (loss) After discontinuing Product A	$   (7,876.00)
Increase in loss	$   (2,326.00)