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.$20,000 increase
c.$30,000 increase
d.$30,000 decrease

Answer 1

What is the amount of change in net income for the current year that will result from the discontinuance of Product G?

d.$30,000 decrease

Step-by-step explanation:

The impact it's a decrease of $30,000 in the net income because the operating income of the product G before the discotinuance it's -$20,000 with a fixed cost of $50,000.

But now with the discotinuance of product G the impact in the total income will be all the fixed cost of $50,000.

The total income of the company with all the products it's $130,000 if the product G it's discontinued the it will have an negativly impact of -$30,000, then the result it's $100,000.

TOTAL

850.000 Sales

-580.000 Variable costs

270.000 Contribution Margin

-140.000 Fixed Cost

-720.000 Total Cost

130.000 Operating Income

Without Product G

TOTAL Product

640.000 Sales

-400.000 Variable costs

240.000 Contribution Margin

-140.000 Fixed Cost

-540.000 Total Cost

100.000 Operating Income

F G H TOTAL Product

300.000 210.000 340.000 850.000 Sales

-180.000 -180.000 -220.000 -580.000 Variable costs

120.000 30.000 120.000 270.000 Cont. Margin

-50.000 -50.000 -40.000 -140.000 Fixed Cost

-230.000 -230.000 -260.000 -720.000 Total Cost

70.000 -20.000 80.000 130.000 Operating Income

F G H TOTAL Product

300.000 - 340.000 640.000 Sales

-180.000 - -220.000 -400.000 Variable costs

120.000 - 120.000 240.000 Cont. Margin

-50.000 -50.000 -40.000 -140.000 Fixed Cost

-230.000 -50.000 -260.000 -540.000 Total Cost

70.000 -50.000 80.000 100.000 Operating Income