The following income statement is for X Company's two products, A and B:
Product A | Product B | |||
Revenue | $92,000 | $85,000 | ||
Total variable costs | 52,440 | 44,200 | ||
Total contribution margin | $39,560 | $40,800 | ||
Total fixed costs | ||||
Avoidable | 15,855 | 29,193 | ||
Unavoidable | 15,855 | 26,947 | ||
Profit | $7,850 | $-15,340 |
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 $38,600,
with $4,200 of additional fixed costs, what will be the effect on
firm profits?
A: $791 | B: $1,147 | C: $1,663 | D: $2,411 | E: $3,496 | F: $5,069 |
Answer
· Correct Answer = Option ‘A’ $ 791
A |
Contribution margin of 'A' |
$39,560 |
B |
Revenue of 'A' |
$92,000 |
C = A/B |
CM Ratio |
43% |
D |
Additional sale of 'A' |
$38,600 |
E = C x D |
Additional contribution margin of 'A' |
$16,598 |
F |
Additional Fixed cost of 'A' |
$4,200 |
G |
Loss on Contribution margin of 'B' |
$40,800 |
H |
Avoidable Fixed Cost of 'B' |
$29,193 |
I = E-F-G+H |
Profit will Increase (Decrease) by |
$791 |
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