Question

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

			Product A	Product B
Revenue			$89,000	$95,000
Total variable costs			47,170	54,150
Total contribution margin			$41,830	$40,850
Total fixed costs
Avoidable			28,830	15,837
Unavoidable			28,830	12,443
Profit			$-15,830	$12,570

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 $24,000, with $4,200 of additional fixed costs, what will be the effect on firm profits?

Answer 1

		Product A	Product B
i	Revenue	$89,000	$95,000
ii	Total variable costs	47,170	54,150
iii	Total contribution margin	$41,830	$40,850
	Total fixed costs
	Avoidable	28,830	15,837
	Unavoidable	28,830	12,443
	Profit	-15830	$12,570
iv=iii/i	Contribution margin % =	47.00%	43.00%
	Increase in contribution margin from B=	10320
	24000*43%
	Saving in fixed cost =		4200
	Saving in avoidable fixed cost =		28,830
	Total saving from stopping product A =	43,350
	Loss of contribution margin from A =	$41,830
	Net saving =		$1,520
	firm profit will increase by =		$1,520