Question

L Corporation produces and sells 14,600 units of Product X each month. The selling price of Product X is $28 per unit, and variable expenses are $22 per unit. A study has been made concerning whether Product X should be discontinued. The study shows that $74,000 of the $101,000 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:

Multiple Choice

($40,400)

($60,600)

$13,400

$40,400

Answer 1

Answer:- If Product X is discontinued, the annual financial (disadvantage) for the company of eliminating this product should be:-($60600).

Explanation:-Net Operating income from product X= Sales-Variable costs-Avoidable fixed costs

=($28 per unit-$22 per unit)*14600 units-$27000

=$60600

Avoidable fixed costs =$101000-$74000 =$27000

Unavoidable fixed costs would continue to occur whether product X is discontinued or not, hence not relevant for decision making.