Question

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

			Product A	Product B
Revenue			$86,000	$90,000
Total variable costs			49,020	46,800
Total contribution margin			$36,980	$43,200
Total fixed costs
Avoidable			17,083	33,488
Unavoidable			12,887	23,272
Profit			$7,010	$-13,560

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 $30,300, with $4,200 of additional fixed costs, what will be the effect on firm profits?

Answer 1

Variable cost of Product A = Variable cost/revenue = 49020/86000 = 57%

Total firm profit = Profit of A + Profit of B = $7010-13560 = $-6550

Profit of the firm after drop of Product B:

Revenue (86000+30300)	$116300
Less: Variable cost (116300*57%)	66291
Contribution margin	$50009
Less: Avoidable fixed cost (17083+4200)	21283
Unavoidable fixed cost (12887+23272)	36159
Profit	$-7433

Net effect = -7433+6550 = $883

Loss of the company will increased by $883.