Question

1. The condensed income statement for a business for the past year is presented as follows:

Sales	X	Y	Z
	$500,000	$300,000	$600,000
Less variable material and cost labor	400,000	190,000	490,000
Less variable overhead	$ 30,000	$ 35,000	$20,000
Less fixed overhead	20,000	30,000	35,000
Income (Loss) from Operations	50,000	45,000	55,000

Peter’s available workforce and supplies is forcing him to temporarily alter his manufacturing operations. He plans to convert one of the productions to make medical face masks as a service to the community. He plans on charging a break-even price on the face masks. Using the info above, which product line should Gary eliminates and convert to the production of medical masks if he wants to minimize losses of earning from the alteration of his production’s lines.

1. Stopping production of Z will minimize losses of income to $110,000.
2. Stopping production of X will minimize losses of income to $70,000.
3. None are correct
4. Stopping production of Y will minimize losses of income to $45,000.

Answer 1

Fixed overheads are irrelevant to this decision making since even if a product is DISCONTINUED the fixed overhead will remain the same

Particulars	X	Y	Z
Sales	$ 500,000	$ 300,000	$ 600,000
Less:
Variable material and cost labor	$ 400,000	$ 190,000	$ 490,000
Variable overhead	$   30,000	$   35,000	$   20,000
Contribution	$   70,000	$   75,000	$   90,000

Option b is correct