Nana Kay Ltd is a multiproduct firm. The revenues of a single product, Germ-D, are GH¢200,000 when 10,000 units are sold. Variable costs are GH¢16 per unit. Direct fixed expenses of GH¢25,000 consists primarily of depreciation on equipment specialised to the product. By what amount will Nana Kay Ltd' cash flow change if the product is dropped? Would you advise Nana Kay Ltd to drop Germ-D

Nana Kay Ltd' cash flow will change by GH¢160,000 if the product is dropped.

Explanation:

Variable costs are cost that change as the level of output change. Therefore, no variable cost will be incurred when there is no sales or production. The variable cost of Nana Kay Ltd can be calculate as follows:

Total variable costs = Units sold * Variable cost per unit = 10,000 * GH¢16 = GH¢160,000

Fixed expenses are expenses that remains the same when there is a change in the level of output. Therefore, fixed expenses will still be incurred whether or not there is a sale or production. The direct fixed expenses of Nana Kay Ltd is GH¢25,000.

From the explanation above, it can be seen that only the variable cost will change, will not be incurred or will become zero when Nana Kay Ltd dropped the product. Therefore, Nana Kay Ltd' cash flow will change by GH¢160,000 if the product is dropped.