Gold Associates currently produces three products. Product Y is showing a net op

Question

Gold Associates currently produces three products. Product Y is showing a net operating loss as indicated by the following condensed income statement prepared for the year ended December 31, 2017.

Gold Associations

Product Y

Condensed Income Statement

For the Year Ended December 31, 2017

Sales (100,000 units at $8)                                       $800,000

Variable costs (100,000 units at $7.85)                        785,000

Contribution margin                                                     15,000

Fixed costs                                                              130,000

Operating loss                                                     $-115,000

You have been hired by Gold Associates to help analyze the decision as to whether to eliminate Product Y. Upon investigation, you discover that if Product Y is eliminated, $15,000 of the fixed costs shown on the above condensed income statement can be eliminated. The remainder of the fixed costs allocated to Product Y are common fixed costs that will be allocated to the remaining two products by Gold Associates.

Determine if Gold Associates should discontinue Product Y.

Explanation / Answer

Loss If we produce Product Y is $ 115000.

Loss if we eliminate Product Y = 130000 -15000 ( Direct Fixed Cost) = $114000.

Here Gold Associates either produce product Y or eliminate product Y.

Because there is no change in Income Statement regarding to Product Y.

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