The condensed income statement for a business for the past year is as follows: P

Question

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

Product

    T

    U

$660,000

$320,000

540,000

220,000

$ 120,000

$100,000

145,000

    40,000

$ (25,000)

$ 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?

Product

    T

    U

Sales

$660,000

$320,000

Less variable costs

540,000

220,000

Contribution margin

$ 120,000

$100,000

Less fixed costs

145,000

    40,000

Income (loss) from operations

$ (25,000)

$ 60,000

Explanation / Answer

Due to Disconitnuance of the Product T the variable cost related to product T can be avoided but Fixed Cost will remain the same so the Fixed cost of $145000 will be allocated to Prouct U. Hence the Net Income(Loss) of Product U will be ($60000-$145000) ($85000) as against the Present Total Loss of $35,000. So the Loss will increase by $50,000 due to disconinuance of hte product.

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