The following information pertains to Lilac Company's three products: $\begin{array}{lrrr}&A&B&C\
\text { Unit sales per month } & 1,800 & 2,800 & 1,600 \
\text { Selling price per unit } & \$ 3.00 & \$ 5.25 & \$ 3.50 \
\text { Variable costs per unit } & 2.00 & 4.00 & 3.80 \
\text { Unit contribution margin } & \$ 1.00 & \$ 1.25 & \$(0.30)
\end{array}$ Assume that product C is discontinued and the space is used to produce B. Product B's production is increased to 4,000 units per month, but the selling price of all units of B is reduced to $5 per unit. Monthly profits will:
A)decrease by $1,000.
B)decrease by $520.
C)increase by $500.
D)increase by $980.

Question

Quizplus · Accepted Answer

The discontinuation of product C removes its negative contribution margin of $0.30 per unit for 1,600 units, resulting in a monthly savings of $480. Increasing product B's production to 4,000 units (an increase of 1,200 units) at a new selling price of $5.00 and a variable cost of $4.00 results in an additional contribution margin of $1.00 per unit, or $1,200. The net effect is an increase in monthly profits of $1,680 ($480 savings from discontinuing C + $1,200 from additional units of B). However, the reduction in selling price for all units of B from $5.25 to $5.00 decreases the contribution margin by $0.25 per unit for the original 2,800 units, resulting in a decrease of $700 in monthly profits. The net increase in monthly profits is $980 ($1,680 - $700).

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