Please answer both 7 and 8. The following information is for X Company\'s two pr

Question

Please answer both 7 and 8.

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

7. If X Company drops Product A because it shows a loss, what will be the effect on firm profits?

8. Assume that if X Company drops Product A, it can use the vacant space to increase sales of Product B by $37,900, but $4,400 of additional fixed costs will be incurred. This use of the vacant space will result in an increase in X Company's profits of

Product A Product B Revenue $87,000    $92,000    Total variable costs   46,980      54,280    Total contribution margin $40,020    $37,720    Total fixed costs    Avoidable 34,771    18,873       Unavoidable   25,179      13,667    Profit $-19,930    $5,180   

Explanation / Answer

7. If X Company drops Product A because it shows a loss, what will be the effect on firm profits?

Variable costs are always avoidable and Fixed costs has two components. One is un avoidable that is it will be done even if

From the above calculation we could see that if company dropp product A it will have loss of $ 5249.

Variable costs are always avoidable and Fixed costs has two components. One is un avoidablethat is it will be done even if the product is not produced and the other one is avoidable that is itwill be saved if the product is not produced.

So dropping of option A is loss of income 5249

And overall profit of the company x will be as follow

8. Assume that if X Company drops Product A, it can use the vacant space to increase sales of Product B by $37,900, but $4,400 of additional fixed costs will be incurred. This use of the vacant space will result in an increase in X Company's profits of

Company Have a profit of 13501 so company should go for this option

Product A Revenue 87000 Total variable costs 46980 Total contribution margin 40020 Total fixed costs    Avoidable 34771 Profit 5249

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