Question

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

			Product A	Product B
Revenue			$88,000	$95,000
Total variable costs			52,800	57,000
Total contribution margin			$35,200	$38,000
Total fixed costs
Avoidable			30,633	15,418
Unavoidable			21,287	14,232
Profit			$-16,720	$8,350

If X Company drops Product A because it shows a loss and is able to use the vacant space to increase sales of Product B by $32,900, with $4,200 of additional fixed costs, what will be the effect on firm profits?

Answer 1

Net profit increase by $ 4,393

Working

	Product A	Product B	TOTAL
Revenue		$127,900.00	$ 127,900.00
Total variable costs		$ 76,740.00	$    76,740.00
Total contribution margin	$             -	$ 51,160.00	$    51,160.00
Total fixed costs
Avoidable		$ 19,618.00	$    19,618.00
Unavoidable	$ 21,287.00	$ 14,232.00	$    35,519.00
Profit	$ (21,287.00)	$ 17,310.00	-$      3,977.00

.

Net Total Income (loss) Before discontinuing Product A (-16720+8350)	$   (8,370.00)
Net Total Income (loss) After discontinuing Product A	$   (3,977.00)
Increase in loss	$      4,393.00

We can see Net loss decrease from 8370 to 3977 so the net loss decrease which is good for the business.