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ACCA Applied Skills · Performance Management · Relevant cost analysis

Cobalt Co is considering stopping Product P, which has sales of $90,000, variable costs of $60,000, directly attributable avoidable fixed costs of $18,000 and apportioned general fixed costs of $20,000 that will continue regardless. What is the effect on Cobalt's profit of stopping Product P?

Closing the product loses contribution of $30,000 but saves only the avoidable fixed costs of $18,000, since apportioned general costs continue anyway. The net effect is that profit falls by $12,000.

  1. AProfit falls by $12,000Correct
  2. BProfit rises by $8,000
  3. CProfit falls by $30,000
  4. DProfit rises by $12,000

Explanation

Stopping P loses contribution of $90,000 - $60,000 = $30,000 but saves avoidable fixed costs of $18,000. Net effect is a $12,000 fall in profit. The apportioned $20,000 continues so it is irrelevant; including it would wrongly suggest a gain of $8,000.

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