Question

The condensed income statement for a Fletcher Inc. for the past year is as follows:

	Product
	F		G		H		Total
Sales	$300,000		$210,000		$340,000		$850,000
Costs:
Variable costs	$180,000		$180,000		$220,000		$590,000
Fixed costs	50,000		50,000		40,000		140,000
Total costs	$230,000		$230,000		$260,000		$730,000
Income (loss)	$ 70,000		$(20,000)		$ 80,000		$120,000

Management is considering the discontinuance of the manufacture and sale of Product G 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 Products F and H. What is the amount of change in net income for the current year that will result from the discontinuance of Product G?

a.$20,000 decrease

b.$30,000 decrease

c.$30,000 increase

d.$20,000 increase

Answer 1

SOLUTION

THERE IS A MISTAKE IN TOTAL OF VARIABLE IT SHOULD BE = 180000+180000+220000 = 580,000 (NOT 590,000)

SO BELOW IS SOLUTION AS PER 580,000

FIRST STEP

SALES AFTER DISCOUNTINUED = 850,000-210,000 = 640000

VARIABLE COST AFTER DISCOUNTINUED = 580,000- 180,000 = 400,000

FIXED COST REMAINS SAME = 140,000, BECAUSE IT IS MENTIONED THAT THERE IS NO EFFECT ON TOTAL FIXED COST.

SO INCOME AFTER DISCONTINUED= SALES - VARIABLE COST - FIXED COST

= 640,000 - 400,000- 140,000

= 100,000

CHANGE IN TOTAL INCOME = ASTER DISCONTINUED- BEFORE DISCONTINUED

= 100,000-120,000

= 20,000 DECREASE IN PROFIT

ANSWER =  a.$20,000 decrease