The following income statement is for X Company's two products, A and B:
| Product A | Product B | |||
| Revenue | $85,000 | $93,000 | ||
| Total variable costs | 50,150 | 53,940 | ||
| Total contribution margin | $34,850 | $39,060 | ||
| Total fixed costs | ||||
| Avoidable | 31,618 | 16,949 | ||
| Unavoidable | 24,842 | 15,031 | ||
| Profit | $-21,610 | $7,080 | ||
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 $36,600,
with $3,000 of additional fixed costs, what will be the effect on
firm profits?
|
A |
Contribution margin of 'B' |
$39,060 |
|
B |
Revenue of 'B' |
$93,000 |
|
C = A/B |
CM Ratio |
42% |
|
D |
Additional sale of 'B' |
$36,600 |
|
E = C x D |
Additional contribution margin of 'B' |
$15,372 |
|
F |
Additional Fixed cost of 'B' |
$3,000 |
|
G |
Loss on Contribution margin of 'A' |
$34,850 |
|
H |
Avoidable Fixed Cost of 'A' |
$31,618 |
|
I = E-F-G+H |
Profit will Increase (Decrease) by |
$9,140 |
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