Question

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

			Product A	Product B
Revenue			$92,000	$85,000
Total variable costs			51,520	46,750
Total contribution margin			$40,480	$38,250
Total fixed costs
Avoidable			15,254	32,915
Unavoidable			11,046	23,835
Profit			$14,180	$-18,500

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 $31,900, with $4,800 of additional fixed costs, what will be the effect on firm profits?

A: $2,690

B: $3,901

C: $5,656

D: $8,202

E: $11,893

F: $17,244

Answer 1

· Correct Answer = Option ‘B’ $ 3901

· Working

A	Contribution margin of 'A'	$40,480
B	Revenue of 'A'	$92,000
C = A/B	CM Ratio	44%
D	Additional sale of 'A'	$31,900
E = C x D	Additional contribution margin of 'A'	$14,036
F	Additional Fixed cost of 'A'	$4,800
G	Loss on Contribution margin of 'B'	$38,250
H	Avoidable Fixed Cost of 'B'	$32,915
I = E-F-G+H	Profit will Increase (Decrease) by	$3,901