The following information pertains to Erickson Company's three products: 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?
$\begin{array}{lrrr}&A&B&C\
\text { Unit sales per year } & \underline{250} & \underline{400} & \underline{250} \
\text { Selling price per unit } & \$ 9.00 & \$ 12.00 & \$ 9.00 \
\text { Variable costs per unit } & \underline{3.60} & \underline{9.00} & 9.90 \\text { Unit contribution margin } & \$ 5.40 & \$ 3.00 & \$(0.90) \
\text { Contribution margin ratio } & 60 \% & 25 \% & (10) \%
\end{array}$
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

Quizplus · Accepted Answer

Discontinuing product C removes its negative contribution margin of $0.90 per unit for 250 units, which is a $225 loss avoided. Renting the extra space adds $300 per month, totaling $3,600 annually. The net effect is an increase in annual profits by $3,825 ($3,600 from rent + $225 saved), not $525.

The Following Information Pertains to Erickson Company's Three Products: Assume