Question

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

			Product A	Product B
Revenue			$90,000	$91,000
Total variable costs			49,500	52,780
Total contribution margin			$40,500	$38,220
Total fixed costs
Avoidable			31,082	16,605
Unavoidable			22,508	14,725
Profit			$-13,090	$6,890

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 $31,000, with $4,600 of additional fixed costs, what will be the effect on firm profits?

Answer 1

· Correct Answer = Profits will Decrease by $ 998 [Answer = $ - 998]

A	Contribution margin of 'B'	$38,220
B	Revenue of 'B'	$91,000
C = A/B	CM Ratio	42%
D	Additional sale of 'B'	$31,000
E = C x D	Additional contribution margin of 'B'	$13,020
F	Additional Fixed cost of 'B'	$4,600
G	Loss on Contribution margin of 'A'	$40,500
H	Avoidable Fixed Cost of 'A'	$31,082
I = E-F-G+H	Profit will Increase (Decrease) by	($998)