Question

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

			Product A	Product B
Revenue			$86,000	$88,000
Total variable costs			49,020	45,760
Total contribution margin			$36,980	$42,240
Total fixed costs
Avoidable			17,561	25,415
Unavoidable			14,959	25,415
Profit			$4,460	$-8,590

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 $24,300, with $5,000 of additional fixed costs, what will be the effect on firm profits?

A: $-6,431

B: $-8,553

C: $-11,376

D: $-15,130

E: $-20,123

F: $-26,764

Answer 1

· Correct Answer = Option ‘C’ $ - 11,376

· Working

A	Contribution margin of 'A'	$36,980
B	Revenue of 'A'	$86,000
C = A/B	CM Ratio	43%
D	Additional sale of 'A'	$24,300
E = C x D	Additional contribution margin of 'A'	$10,449
F	Additional Fixed cost of 'A'	$5,000
G	Loss on Contribution margin of 'B'	$42,240
H	Avoidable Fixed Cost of 'B'	$25,415
I = E-F-G+H	Profit will Increase (Decrease) by	($11,376)