Question

The following income statement is for X Company's two products, A and B:

			Product A	Product B
Revenue			$86,000	$95,000
Total variable costs			51,600	55,100
Total contribution margin			$34,400	$39,900
Total fixed costs
Avoidable			13,182	30,206
Unavoidable			12,168	21,874
Profit			$9,050	$-12,180

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 $31,500, with $4,000 of additional fixed costs, what will be the effect on firm profits?

Answer 1

Current total profits = $9,050 - $12,180 = $3,130

New profits:

Particulars	Product A	Product A - new	Product B	Total
Revenue	$     86,000	$31,500	$        -	$ 117,500
Total variable costs	$     51,600	$18,900	$        -	$   70,500
Total contribution margin	$     34,400	$12,600	$        -	$   47,000
Total fixed costs
Avoidable	$     13,182	$ 4,000	$        -	$   17,182
Unavoidable	$     12,168	$       -	$ 21,874	$   34,042
Profit	$      9,050	$ 8,600	$(21,874)	$    (4,224)

Net loss is $4,224

Firms total profits declined. Amount of increase in loss = $4,224 - $3,130 = $1,094.

Losses increased because product B is delivering profits but net profit is loss because of unavoidable fixed costs.

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