The following income statement is for X Company's two products, A and B:
Product A | Product B | |||
Revenue | $88,000 | $90,000 | ||
Total variable costs | 52,800 | 50,400 | ||
Total contribution margin | $35,200 | $39,600 | ||
Total fixed costs | ||||
Avoidable | 15,370 | 32,060 | ||
Unavoidable | 11,130 | 27,310 | ||
Profit | $8,700 | $-19,770 |
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 $27,700,
with $3,400 of additional fixed costs, what will be the effect on
firm profits?
A: $75 | B: $87 | C: $102 | D: $119 | E: $140 | F: $164 |
Answer
· Correct Answer = Option ‘E’ $ 140
A |
Contribution margin of 'A' |
$35,200 |
B |
Revenue of 'A' |
$88,000 |
C = A/B |
CM Ratio |
40% |
D |
Additional sale of 'A' |
$27,700 |
E = C x D |
Additional contribution margin of 'A' |
$11,080 |
F |
Additional Fixed cost of 'A' |
$3,400 |
G |
Loss on Contribution margin of 'B' |
$39,600 |
H |
Avoidable Fixed Cost of 'B' |
$32,060 |
I = E-F-G+H |
Profit will Increase (Decrease) by |
$140 |
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