Question

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

			Product A	Product B
Revenue			$86,000	$89,000
Total variable costs			48,160	51,620
Total contribution margin			$37,840	$37,380
Total fixed costs
Avoidable			13,992	25,635
Unavoidable			12,408	25,635
Profit			$11,440	$-13,890

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 $26,200, with $4,000 of additional fixed costs, what will be the effect on firm profits

Answer 1

Income statement if Product B is dropped
Revenue		$112,200	(86000+26200)
Total variable cost		$62,832	(48160/86000*112200)
Total Contribution Margin		$49,368
Total fixed Costs
Avoidable	$13,992
Unavoidable	$38,043		(12408+25635)
Additional fixed Cost	$4,000	$56,035
Profit		-$6,667
Existing profit of the company if Product B is continued	-2450	(11440-13890)
Profit after product B is dropped	-$6,667
Additional loss if product B is dropped	-$4,217
Since, dropping the product B will have adverse impact on profit by $4217. The Product B SHOULD NOT BE DROPPED.