The following income statement is for X Company's two products, A and B:
Product A Product B
Revenue $90,000 $94,000
Total variable costs 51,300 56,400
Total contribution margin $38,700 $37,600
Total fixed costs Avoidable 28,837 14,566
Unavoidable 23,593 11,444
Profit $-13,730 $11,590
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 $24,600, with $5,000 of additional fixed costs, what will be the effect on firm profits?
· Correct Answer = Profits will decrease by $ 5023 [Answer: $ - 5023]
|
A |
Contribution margin of 'B' |
$37,600 |
|
B |
Revenue of 'B' |
$94,000 |
|
C = A/B |
CM Ratio |
40% |
|
D |
Additional sale of 'B' |
$24,600 |
|
E = C x D |
Additional contribution margin of 'B' |
$9,840 |
|
F |
Additional Fixed cost of 'B' |
$5,000 |
|
G |
Loss on Contribution margin of 'A' |
$38,700 |
|
H |
Avoidable Fixed Cost of 'A' |
$28,837 |
|
I = E-F-G+H |
Profit will Increase (Decrease) by |
($5,023) |
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