The following information is for X Company's two products - A and B: Product A Product B Total...

Question:

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

Product A Product B
Total contribution margin $41,760 $37,800
Contribution margin rate 48% 42%
Fixed costs $54,830 $26,510
Profit $13,070 $11,290

10% of Product A's fixed costs are allocated; 20% of Product B's fixed costs are allocated. The unallocated fixed costs are directly related to individual products.

The company is considering dropping Product A because of the $13,070 loss. If X Company drops A, it will use the freed-up resources to increase sales of Product B by $14,800, but there will be additional fixed costs of $2,000. If X Company drops A, firm profits will change by _____.

Relevant Costing:

Relevant costing is a part of costing analysis which deals with the evaluation of decisions involving the introduction of new processes or products or dissonance of existing products. It classifies the cost into three categories.

  1. relevant: directly used in the analysis
  2. irrelevant: indirectly used
  3. sunk cost: not used

Answer and Explanation:

If company X stops the production of A, then:

  1. It will lose the existing contribution margin from A = $41760.
  2. It will save unallocated or directly linked fixed cost of A ($54830 * 90%) = $49347.
  3. It will get an extra contribution from B ($14800 * 42%) = $6216.
  4. It will also have to incur additional fixed cost to produce extra units of B = $2000.

Therefore, the change in overall profit = ($49347 + $6216 - $41760 - $2000) = $11803.


Learn more about this topic:

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Relevant Costs in Eliminating a Product or Segment

from Accounting 301: Applied Managerial Accounting

Chapter 9 / Lesson 12
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