Question

Shipment Company produces and sells 10000 units of product C each year. Each unit sells for $10 and has a variable cost of $4. The controller estimates that eliminating production of Product C would save 80% of the $55000 in fixed costs identified with production of the product. If product C is eliminated, the overall net income of the company would show a:

Jpe 800 000 10. Shipman Company produces and sells 10,000 units of Product C each year. Each unit sells for $10 and has variable costs of $4. The controller estimates that eliminating production of Product C would save 80% of the $55,000 in fixed costs identified with production of the product. If Product C is eliminated, the overall net income of the company would show a: a. $16,000 decrease b. $60,000 decrease c. $16,000 increase d. $60,000 increase None of these e. T2 000 002 o 000.00 00,082

Answer 1

WORKING NOTES:
	CALCULATION OF LOSS ON CONTRIBUTION BY ELIMINATING PRODUCT C
	Sales Revenue (10,000 untis X $ 10)	$          1,00,000
	Less: Variable Cost (10000 units X $ 4)	$             40,000
	Contribution generated	$             60,000
SOLUTION:
	CALCULATION OF GAIN OR LOSS ON ELIMINATING PRODUCT C
	Fixed assets Cost saving ($ 55,000 X 80%)	$             44,000
	Less: Loss of contribution on product C	$             60,000
	Net decrease in income	$            -16,000
	Answer = Option A = $ 16,000 Decrease