Lusk Corporation produces and sells 14,800 units of Product X each month. The selling price of Product X is $30 per unit, and variable expenses are $24 per unit. A study has been made concerning whether Product X should be discontinued. The study shows that $74,000 of the $112,000 in monthly fixed expenses charged to Product X would not be avoidable even if the product was discontinued. If Product X is discontinued, the annual financial advantage (disadvantage) for the company of eliminating this product should be:

Question

Raymond Duncan

Business

22 September, 14:27

Lusk Corporation produces and sells 14,800 units of Product X each month. The selling price of Product X is $30 per unit, and variable expenses are $24 per unit. A study has been made concerning whether Product X should be discontinued. The study shows that $74,000 of the $112,000 in monthly fixed expenses charged to Product X would not be avoidable even if the product was discontinued. If Product X is discontinued, the annual financial advantage (disadvantage) for the company of eliminating this product should be:

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Answers (1)

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Bentley Rowland · Answer 1

The income will decrease by $50,800

Explanation:

Giving the following information:

Product X:

Sales = 14,800*30 = 444,000

Variable costs = 14,800*24 = (355,200)

Contribution margin = 88,800

Fixed costs = (112,000)

Net income = (23,200)

The study shows that $74,000 of the $112,000 in monthly fixed expenses charged to Product X would not be avoidable even if the product was discontinued.

Now, we need to calculate the effect on income if Product X is discontinued.

Effect on income = net income - unavoidable fixed costs

Effect on income = 23,200 - 74,000 = - 50,800

The income will decrease by $50,800