Question

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

			Product A	Product B
Revenue			$93,000	$91,000
Total variable costs			55,800	53,690
Total contribution margin			$37,200	$37,310
Total fixed costs
Avoidable			16,770	29,172
Unavoidable			11,180	26,928
Profit			$9,250	$-18,790

If X Company drops Product B because it shows a loss and is able to use the vacant space to increase sales of Product A by $26,700, with $4,600 of additional fixed costs, what will be the effect on firm profits?  

Answer 1

• Correct Answer = Profits will decrease by $ 2058 [Answer: $ - 2058]

A	Contribution margin of 'A'	$37,200
B	Revenue of 'A'	$93,000
C = A/B	CM Ratio	40%
D	Additional sale of 'A'	$26,700
E = C x D	Additional contribution margin of 'A'	$10,680
F	Additional Fixed cost of 'B'	$4,600
G	Loss on Contribution margin of 'B'	$37,310
H	Avoidable Fixed Cost of 'B'	$29,172
I = E-F-G+H	Profit will Increase (Decrease) by	($2,058)