A Company Produces Products A, B and C and the Profit

question 96

Multiple Choice

A company produces products A, B and C and the profit and loss statement for the past twelve months shows the following (in thousands) details.
The company is considering dropping Product C. If it does this, the fixed costs will remain the same except that the firm will be able to rent out excess factory space at $30 000 per annum. If other revenue and cost figures remained the same, what would be the effect on annual profit of dropping Product C?

• A) 0
• B) Increase of $30 000
• C) Increase of $40 000
• D) Decrease of $10 000

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Definitions:

Initial Value Method

An accounting method for investment accounting where the investment is recorded at its cost at the time of purchase, without subsequent adjustments for market changes.

Intra-entity Gross Profit

The profit recognized within a consolidated entity from transactions among its varying parts, not yet realized outside the entity.

Consolidation Worksheet

A document used in the preparation of consolidated financial statements which combines the financial statements of a parent company and its subsidiaries.

Initial Value Method

An accounting approach where investments are recorded at their purchase cost without subsequent adjustments for changes in market value.