The following income statement is for X Company and its only two products - A and B: Total Product A Product B Sales $183,530 $90,190 $93,340 Variable Costs 103,710 50,506 53,204 Contribution margin $79,820 $39,684 $40,136 Fixed costs: Avoidable 52,270 30,380 21,890 Unavoidable 32,110 25,390 6,720 Profit $-4,560 $-16,086 $11,526 Because Product A is showing a loss, X Company is considering dropping it and saving its avoidable fixed costs. If it drops Product A, X Company's new profits will be?
Answer : If it drops product A, the company's new profit will be -$13864.
If continued | If dropped | |||||
A | B | total | A | B | total | |
Sales | $90190 | $93340 | $183530 | $0 | $93340 | $93340 |
(-) variable cost | $50506 | $53204 | $103710 | $50506 | $53204 | $53204 |
Contribution margin | $$39684 | $40136 | $79820 | $0 | $40136 | $40136 |
(-) fixed cost : | ||||||
Avoidable | $30380 | $21890 | $52270 | $0 | $21890 | $21890 |
Unavoidable | $25390 | $6720 | $32110 | $25390 | $6720 | $32110 |
Net profit (loss) | ($16086) | $11526 | ($4560) | ($25390) | $11526 | ($13864) |
As it increases net loss, dropping of product A is not adviced.
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