Question

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

			Product A	Product B
Revenue			$95,000	$89,000
Total variable costs			57,000	45,390
Total contribution margin			$38,000	$43,610
Total fixed costs
Avoidable			14,003	29,325
Unavoidable			11,457	21,235
Profit			$12,540	$-6,950

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 $29,400, with $4,600 of additional fixed costs, what will be the effect on firm profits?

Answer 1

Decrease in net income by $7,125

Working

	Product A	Product B	TOTAL
Revenue	$124,400.00		$ 124,400.00
Total variable costs	$ 74,640.00		$    74,640.00
Total contribution margin	$ 49,760.00	$             -	$    49,760.00
Total fixed costs
Avoidable	$ 14,003.00		$    14,003.00
Unavoidable	$ 16,057.00	$ 21,235.00	$    37,292.00
Profit	$ 19,700.00	$ (21,235.00)	-$      1,535.00

.

Net Total Income (loss) Before discontinuing Product B (12540-6950)	$      5,590.00
Net Total Income (loss) After discontinuing Product B	$   (1,535.00)
Decrease in Net Overall income	$      7,125.00