Question

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

			Product A	Product B
Revenue			$92,000	$88,000
Total variable costs			47,840	50,160
Total contribution margin			$44,160	$37,840
Total fixed costs
Avoidable			31,453	13,759
Unavoidable			22,777	10,811
Profit			$-10,070	$13,270

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 $37,400, with $3,800 of additional fixed costs, what will be the effect on firm profits?

Answer 1

· Correct Answer = Net Profits will DECREASE by $ 425 [Answer = $ -425]

A	Contribution margin of 'B'	$37,840
B	Revenue of 'B'	$88,000
C = A/B	CM Ratio	43%
D	Additional sale of 'B'	$37,400
E = C x D	Additional contribution margin of 'B'	$16,082
F	Additional Fixed cost of 'B'	$3,800
G	Loss on Contribution margin of 'A'	$44,160
H	Avoidable Fixed Cost of 'A'	$31,453
I = E-F-G+H	Profit will Increase (Decrease) by	($425)