Question

XYZ sells 20,000 units of Product A each year. The unit selling price of Product A is $80, and the unit variable expenses are $72. An investigation shows that $140,000 of the $240,000 fixed expenses charged to Product A would not be avoidable if the product was discontinued. If Product A is discontinued, what is the annual financial advantage (disadvantage) of eliminating this product?

• $60,000

• ($80,000)

• ($60,000)

• $80,000

Answer 1

Statement showing net income/loss for product A.

Particulars Amount in $

Sales ( $80×20000). $16,00,000

Less:

Variable expenses

($72×20000) $14,40,000

Contribution $1,60,000

Less:

Fixed cost $2,40,000

Net loss ($80,000)

If product A is discontinued then unavoidable fixed cost is $140,000

Financial disadvantage of discontinuing product A is $140000-$80000

=($60000)

If product A is continued then it will incurr a loss of $80000, if it discontinues then unavoidable fixed cost is $140000

Additional loss is ($60000).