Question

The following are the budgeted profit functions for X Company's two products, A and B, next...

The following are the budgeted profit functions for X Company's two products, A and B, next year:

Product A:   P = .40 (R) - $27,970

Product B:   P = .45 (R) - $59,080

where R is revenue. Budgeted revenue for the two products are $86,000 and $94,000, respectively. Unavoidable fixed costs for the two products are $10,908 and $24,814, respectively. The company is considering dropping Product B; if it does, the resulting freed-up resources can be used to increase revenue from sales of Product A by $14,700, with no additional fixed costs.

If X Company drops B and increases revenue from A, firm profits will change by?

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Answer #1

Firm's Profit if Both A&B products continued:

Product A = .40*(86000) - $27,970 = $6,430 Profit

Product B = .45*(94000) - $59,080= $16,870 (LOSS)

Loss of Firm = $6,430- $16,870 = -$10,440

Firm's Profit if Product B is dropped and Revenue from A is increased:

Product B= - $24,814 (Loss of unavoidable fixed cost as this product is dropped)

Product A:

Increased Revenue = $86,000 +$14,700= $100,700

Profit from Product A = .40*(1,00,700) - $27,970 = $12,310

profit of Firm = -$10,440+ $12,310 = $1,870

Therefore,

Change in Firm's Profit = $1,870 - (-$10,440)

Hence firm's profir will increase by $8,570.

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