The following income statement is for X Company's two products, A and B:
| Product A | Product B | |||
| Revenue | $88,000 | $89,000 | ||
| Total variable costs | 51,920 | 52,510 | ||
| Total contribution margin | $36,080 | $36,490 | ||
| Total fixed costs | ||||
| Avoidable | 29,468 | 17,535 | ||
| Unavoidable | 25,102 | 12,185 | ||
| Profit | $-18,490 | $6,770 | ||
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 $33,500,
with $4,600 of additional fixed costs, what will be the effect on
firm profits?
· Correct Answer = Profits will Increase by $ 2523
|
A |
Contribution margin of 'B' |
$36,490 |
|
B |
Revenue of 'B' |
$89,000 |
|
C = A/B |
CM Ratio |
41% |
|
D |
Additional sale of 'B' |
$33,500 |
|
E = C x D |
Additional contribution margin of 'B' |
$13,735 |
|
F |
Additional Fixed cost of 'B' |
$4,600 |
|
G |
Loss on Contribution margin of 'A' |
$36,080 |
|
H |
Avoidable Fixed Cost of 'A' |
$29,468 |
|
I = E-F-G+H |
Profit will Increase (Decrease) by |
$2,523 |
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