Data covering QMB Corporation's two product lines are as follows: Product "W" Product "Z"...

Question:

Data covering QMB Corporation's two product lines are as follows:

Product "W" Product "Z"
Sales P36,000 P25,200
Income before income tax 15,936 (8,388)
Sales price per unit 30 14
Variable cost per unit 8.50 15

The total units sold of "W" was 2,400 and that "Z" was 3,600 units. If product "Z" is discontinued and this results in a 400 units decrease in sales of product "W", the total effect on income will be?

Financial Effect of Discontinuing a Product:

In order to calculate the financial impact that discontinuing a product, the irrelevant costs should be identified and ignored in the calculations. Irrelevant costs are those costs that will not change if the product is discontinued.

Answer and Explanation:


The effect on operating income will be:

Loss in sales revenue P(25,200) (1,800 units)
Saving in variable expenses Product Z 27,000
(P15 x 1,800)
Loss in contribution margin Product W (8,600 )
(P30 - P8.50 = P21.50 x 400)
Decrease in oeprating income P6,800



Learn more about this topic:

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Relevant Costs in Eliminating a Product or Segment

from Accounting 301: Applied Managerial Accounting

Chapter 9 / Lesson 12
1.3K

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