Question

Lusk Corporation produces and sells 14,500 units of Product X each month. The selling price of Product X is $27 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 $73,000 of the $100,000 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:

.

The SP Corporation makes 44,000 motors to be used in the production of its sewing machines. The average cost per motor at this level of activity is:

Direct materials	$	10.30
Direct labor	$	9.30
Variable manufacturing overhead	$	3.85
Fixed manufacturing overhead	$	4.80

An outside supplier recently began producing a comparable motor that could be used in the sewing machine. The price offered to SP Corporation for this motor is $26.35. If SP Corporation decides not to make the motors, there would be no other use for the production facilities and none of the fixed manufacturing overhead cost could be avoided. Direct labor is a variable cost in this company. The annual financial advantage (disadvantage) for the company as a result of making the motors rather than buying them from the outside supplier would be:

Answer 1

Lusk Corporation :-

Contribution Margin lost = 14500 * ( 27 - 21 ) = $ 87000

Less:- Avoidable Fixed expenses = ( 100000 - 73000 ) = $ 27000

So, If Product X is discontinued, the annual financial disadvantage for the company of eliminating this product should be ( 87000 - 27000 ) $ 60000.

SP Corporation :-

Relevant Cost of making the motors = 10.30 + 9.30 + 3.85 = $ 23.45

Note:- Fixed manufacturing overhead is Irrelevant Cost as it could not be avoided.

Cost of buying = $ 26.35

The annual financial advantage for the company as a result of making the motors rather than buying them from the outside supplier would be: 44,000 motors * ( 26.35 - 23.45 ) = $ 127600