Question

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 1

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