Question

Product T U Sales $680,000 $320,000 Costs: Variable costs $540,000 $ 220,000 Fixed costs 145,000 40,000 Total costs $685,000 $260,000 Income (loss) $ (5,000) $ 60,000 Management is considering the discontinuance of the manufacture and sale of Product T at the beginning of the current year. The discontinuance would have no effect on the total fixed costs and expenses or on the sales of Product U. What is the amount of change in net income for the current year that will result from the discontinuance of Product T?

Answer 1

Answer:

Amount of change in current income = $55,000 - (-$85,000) = $140,000

As there is loss from discontinuing product T.

Explanation:

Provided information,

There are two products T and U

Particulars                                    T                  U

Sales                                    $680,000   $320,000

Less: Variable Cost             $540,000    $220,000

Less: Fixed Cost                  $145,000     $40,000

Net Income                            ($5,000)     $60,000

NET PROFIT OF COMPANY = $55,000

As the company is planning to discontinue the production of product T there will be the following effects, provided no fixed cost cannot be avoided.

Thus, with same quantum of Product U

Total profit from product U = $60,000

Less: Fixed cost unavoidable $145,000

Thus, result is loss of $85,000

Total change = $55,000 - (-$85,000) = $140,000 decrease in net income.