Paxton Products has three product lines: A, B, and C. Management is considering dropping product line B. In order for the dropping of product line B to not cause an overall decrease in profits, product line B's avoidable fixed costs should be at least:

Question

Paxton Products has three product lines: A, B, and C.  Management is considering dropping product line B. In order for the dropping of product line B to not cause an overall decrease in profits, product line B's avoidable fixed costs should be at least:

Quizplus · Accepted Answer

In order for the dropping of product line B to not cause an overall decrease in profits, its contribution margin should be equal to or less than its avoidable fixed costs. Let X be the avoidable fixed costs of product line B. 
Then, the contribution margin of product line A = $110,000 - 40%($110,000) = $66,000.
The contribution margin of product line C = $150,000 - 60%($150,000) = $90,000.
The contribution margin of product line B = $50,000 - X.
If we drop product line B, the total contribution margin will be $66,000 + $90,000 = $156,000.
Therefore, we need to have:
$156,000 ≥ $66,000 + $50,000 - X
$X ≥ $30,000
Therefore, the minimum value of X should be $30,000 to avoid an overall decrease in profits. Thus, the best answer is B.

Paxton Products Has Three Product Lines: A, B, and C