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2 January, 19:42

Lusk corporation produces and sells 20,000 units of product x each month. the selling price of product x is $30 per unit, and variable expenses are $21 per unit. a study has been made concerning whether product x should be discontinued. the study shows that $50,000 of the $250,000 in fixed expenses charged to product x would not be avoidable even if the product was discontinued. if product x is discontinued, the company's overall net operating income would:

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  1. 2 January, 19:45
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    From economics, we know that the formula for Profit is:

    Profit = Income - Total Cost

    Case 1: Continue producing and selling product x

    income is calculated as:

    Income = ($30 / unit) * (20, 000 units)

    Income = $ 600, 000

    Total cost is composed of both the fixed cost and variable cost:

    Total cost = Variable cost + Fixed cost

    Total cost = ($21 / unit) * (20, 000 units) + $250,000

    Total cost = $670, 000

    Therefore, the profit of producing and selling product x each month is:

    Profit = $ 600, 000 - $670, 000

    Profit 1 = - $70, 000 (decifit)

    Case 2: Discontinue producing and selling product x

    Since there is no income but there is unavoidable fixed cost of $50,000, therefore:

    Profit 2 = - $50, 000 (deficit)

    The company’s overall net operating income would be the change in profit (deficit in this case):

    Net operating income = Profit 2 - Profit 1

    Net operating income = - $50, 000 - ( - $70, 000)

    Net operating income = $20, 000

    Therefore discontinuing product x would result in an increase in the overall net operating income by $20,000 per month.
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