Final answer:
To determine the impact on income from eliminating product G, Gilbert's management must compare the revenues lost to the variable costs saved. Fixed costs must be considered as they still need to be covered regardless of whether product G is eliminated or not.
Step-by-step explanation:
The question asks about the impact of eliminating product G on Gilbert's management's net income. To answer this question, we should consider a few key factors: the fixed costs, variable costs, and total revenues that are associated with product G.
If product G is eliminated, Gilbert's management would no longer generate revenues from product G. However, any variable costs that are directly associated with the production of product G would also be saved. If the demand curve is inelastic, a price increase typically results in less than a proportional decrease in quantity demanded, meaning that total revenue would decrease if Gilbert's management eliminates product G, assuming product G was contributing positive marginal revenue.
To understand the change in income after eliminating product G, we need to calculate the difference between the revenues generated by product G and the variable costs. Since shutting down can reduce variable costs but not fixed costs, they must decide if the contribution margin from product G is covering a sufficient portion of the fixed costs to warrant continuation. If not, the change in income from eliminating product G could be positive, despite any lost revenue, as long as the variable costs exceed the revenues that product G would have brought in.
Example: If product G generates $125 in revenues and has variable costs of $100 and fixed costs of $30, the profit contribution of product G is $125 - $100 = $25. Eliminating product G would save $100 in variable costs but would also result in losing $125 in revenue. However, the fixed costs of $30 would still need to be covered by the other products or would represent a loss if product G is the only product contributing to them.