, 26.12.2019Mariela2699

# 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. the amount of change in profit for the current year that will result from the discontinuance of product g is a a. exist30,000 increase b, exist20,000 increase c exist30,000 decrease d. exist20,000 decrease

## Answers

net income will decrease by \$30,000

Explanation:

The information is incomplete, so I looked for a similar question (see attached image).

Even though product G resulted in a \$20,000 loss, it absorbed \$50,000 of fixed costs.

The net financial effect of discontinuing product G = unavoidable fixed costs - previous gain or loss resulting from operations = -\$50,000 - (-\$20,000) = -\$50,000 + \$20,000 = -\$30,000.

So net income will decrease by \$30,000.

It is more convenient to continue processing.

Explanation:

Giving the following information:

Grace Co. can further process Product B to produce Product C. Product B is currently selling for \$60 per pound and costs \$38 per pound to produce. Product C would sell for \$95 per pound and would require an additional cost of \$13 per pound to produce.

To determine the convenience of further processing we need to calculate the contribution margin:

CM= selling price - unitary variable cost

Product B= 60 - 38= 22 per unit

Product C= 95 - 38 - 13= 44 per unit

Option C. 30,000 decrease

Explanation:

At the moment Product G is covering its own variable cost which is 180,000 from its sale figure of 210,000. So there is a balance of 30,000 which product G is contributing to offset the Fixed costs of the company.

It will be inadvisable for management to discontinue the production of Product G because it appears to be making a loss. The loss is as a result of the fixed cost of 50,000 imposed (apportioned) to the product. So product G can only cover 30,000 out of this 50,000 which is resulting in the 20,000 loss.

If the product is discontinued, the 30,000 contribution of product G will be lost which will lead to a decrease in profit of that amount.

Do you know the answer?

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