Question

Lusk Corporation produces and sells 14,200 units of Product X each month. The selling price of Product X is $24 per unit, and variable expenses are $18 per unit. A study has been made concerning whether Product X should be discontinued. The study shows that $73,000 of the $103,000 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:

Answer 1

Answer:-Selling price of Product X=$24 per unit

Variable expenses of Product X=$18 per unit

Contribution per unit Product X =$24 per unit-$18 per unit=$6 per unit

Total monthly fixed expenses =$103000

Unavoidable fixed expenses =$73000

Avoidable fixed expenses =$30000

Net operating income =(14200 units*$6 per unit)-30000 = $55200

If Product X is discontinued, the annual financial advantage (disadvantage) for the company of eliminating this product should be:$55200

Unavoidable fixed expenses of $73000 would be incurred whether product X discontinued or not, hence should not considered for decision making.