Question

The following income statement is for X Company's two products, A and B: Revenue Total variable costs Total contribution margin Total fixed costs Avoidable Product A $92,000 54,280 $37,720 Product B $88,000 52,800 $35,200 Unavoidable 16,354 15,096 $6,270 30,931 27,429 $-23,160 Profit 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 $38,400, with $3,400 of additional fixed costs, what will be the effect on firm profits? A: $3,307 B: $4,134 OC: $5,168 OD: $6,460 OE: $8,075 OF: $10,094

Answer 1

Answer

· Correct Answer = Option ‘E’ $ 8075

A	Contribution margin of 'A'	$37,720
B	Revenue of 'A'	$92,000
C = A/B	CM Ratio	41%
D	Additional sale of 'A'	$38,400
E = C x D	Additional contribution margin of 'A'	$15,744
F	Additional Fixed cost of 'A'	$3,400
G	Loss on Contribution margin of 'B'	$35,200
H	Avoidable Fixed Cost of 'B'	$30,931
I = E-F-G+H	Profit will Increase (Decrease) by	$8,075