Product X Product Y

Sales revenue $128,000 $192,000

Variable manufacturing cost 48,000 80,000

Fixed manufacturing cost 40,000 60,000

Gross margin 40,000 52,000

Fixed selling and administration 11,200 16,800

Variable selling and administration 14,400 40,000

Net income $14,400 $(4,800)

Upon review of the financial results, the owner of the company wanted to drop product Y. If product Y is dropped, the company expects to increase the sales of product X by next year and there will be no change to the company's cost structure.

Required:

a) Compute the contribution margin ratio for Product X and Product Y.

b) Compute the change in annual income if product Y is dropped and only product X is sold.