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The following income statement is for X Company's two products, A and B: Product A Product B Revenue $93,000 $93,000 Total variable costs 55,800 50,220 Total contribution margin $37,200 $42,780 Total fixed costs Avoidable 14,556 30,542 Unavoidable 9,704 24,988 Profit $12,940 $-12,750 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 $35,900, with $3,000 of additional fixed costs, what will be the effect on firm profits?
A |
Contribution margin of 'A' |
$37,200 |
B |
Revenue of 'A' |
$93,000 |
C = A/B |
CM Ratio |
40% |
D |
Additional sale of 'A' |
$35,900 |
E = C x D |
Additional contribution margin of 'A' |
$14,360 |
F |
Additional Fixed cost of 'A' |
$3,000 |
G |
Loss on Contribution margin of 'B' |
$42,780 |
H |
Avoidable Fixed Cost of 'B' |
$30,542 |
I = E-F-G+H |
Profit will Increase (Decrease) by |
($878) |
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