The following information pertains to Erickson Company's three products: $\begin{array}{rrrr}
& \text { A } & \text { B } & C \
\text { Unit sales per year } & 250 & 400 & 250\
\text { Selling price per unit } & \$ 9.00 & \$ 12.00 & \$ 9.00 \
\text { Variable costs per unit } & 3.60 & 9.00 & 9.90\
\text { Unit contribution margin } &\$ 5.40&\$ 3.00&\$(0.90)\
\text { Contribution margin ratio }&60\%&25\%&(10)\%
\end{array}$ Assume that product C is discontinued and the extra space is rented for $300 per month.All other information remains the same as the original data.What would be the effect on annual profits?
A) Annual profits would decrease by $75.
B) Annual profits would remain the same.
C) Annual profits would increase by $75.
D) Annual profits would increase by $525.

Question

The following information pertains to Erickson Company's three products: $\begin{array}{rrrr} 
& \text { A } & \text { B } & C \
\text { Unit sales per year } & 250 & 400 & 250\
\text { Selling price per unit } & \$ 9.00 & \$ 12.00 & \$ 9.00 \
\text { Variable costs per unit } & 3.60 & 9.00 & 9.90\
\text { Unit contribution margin } &\$ 5.40&\$ 3.00&\$(0.90)\
\text { Contribution margin ratio }&60\%&25\%&(10)\%
\end{array}$ Assume that product C is discontinued and the extra space is rented for $300 per month.All other information remains the same as the original data.What would be the effect on annual profits?
A) Annual profits would decrease by $75.
B) Annual profits would remain the same.
C) Annual profits would increase by $75.
D) Annual profits would increase by $525.

Quizplus · Accepted Answer

Discontinuing product C eliminates its negative contribution margin, improving profits by $225 (250 units x -$0.90). Renting the space adds $3,600 annually ($300 x 12), totaling a $3,825 increase in profits.

The Following Information Pertains to Erickson Company's Three Products Assume That Product C Is Discontinued and the Extra Space