Question

Duvel Ltd. currently manufactures three products: X, Y, and Z. Results from the previous fiscal year for these products are presented below:

	Product X	Product Y	Product Z
Sales - units	7417	5184	9686
Sales price per unit	$80	$44	$61
Variable cost per unit	$57	$30	$31
Fixed costs	$90700	$50893	$156217

Duvel is considering eliminating Product Y in order to focus their efforts on its other two products.

The discontinuation of Product Y is expected to cause the following changes:

	A 19% increase in the production and sales of Product X
	A 6% decrease in the production and sales of Product Z
	61% of the fixed costs of Product Y will be eliminated

What is the incremental (change in) income of the company if Product Y is discontinued?

Select one:

a. $-34414

b. $-26554

c. $-57599

d. $46022

Answer 1

Answer

Current Income Statement
Product	Total	X	Y	Z
Sales price per unit		80	44	61
Variable cost per unit		57	30	31
Sales - units		7,417	5,184	9,686
Sales	1,412,302	593,360	228,096	590,846
Less: Variable Cost	878,555	422,769	155,520	300,266
Contribution Margin	533,747	170,591	72,576	290,580
Less: Fixed costs	297,810	90,700	50,893	156,217
Net Income	235,937	79,891	21,683	134,363

It is mentioned in the question that Sale of X will Increase by 19% AND sales of Z will decrease by 6%.

And 61% of the Fixed cost of Y will be eliminated.

New X sales = (7,417 + 19%)

= 8,826.23 Units

New X sales = 8,826 Units

New Z Sales = (9,686 – 6%)

= 9104.84 Units

New Z Sales = 9,105 Units

Y’s Fixed Cost which will be still there = Y’s Fixed Cost * 39% (100 – 61%)

= 50893 * 39%

= 19,848.27

Y’s Fixed Cost which will be still there = 19,848

Proposed Income Statement
Product	Total	X	Y	Z
Sales price per unit		80	-	61
Variable cost per unit		57	-	31
Sales - units		8,826	-	9,105
Sales	1,261,494	706,098	-	555,395
Less: Variable Cost	785,345	503,095	-	282,250
Contribution Margin	476,148	203,003	-	273,145
Less: Fixed costs
Traceable Fixed Cost	246,917	90,700		156,217
UnTraceable Fixed Cost	19,848
Net Income	209,383	112,303	-	116,928

Conclusion

As we can see that there is a decrease in the Net Income, So

Decrease in Income = Old Net Income – New Net Income

= 235,937 – 209,383

Decrease in Income = $26,554

Answer = (26,554) or -26,554