Question

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

			Product A	Product B
Revenue			$92,000	$89,000
Total variable costs			54,280	49,840
Total contribution margin			$37,720	$39,160
Total fixed costs
Avoidable			16,054	32,082
Unavoidable			13,676	25,208
Profit			$7,990	$-18,130

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 $28,200, with $4,000 of additional fixed costs, what will be the effect on firm profits?

Answer 1

Effect on Profits = Fixed costs Avoided + Additional contribution margin on Product A - Additional Fixed costs - Contribution Margin lost on Product B

= 32,082 + 37,720*28200/92000 - 4000 - 39160

= $484

i.e. profits will increase by $484