Question

Lusk Corporation produces and sells 10,000 units of Product X each month. The selling price of Product X is $40 per unit, and variable expenses are $32 per unit. A study has been made concerning whether Product X should be discontinued. The study shows that $70,000 of the $120,000 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 ($30,000) $30,000 $40,000 ($40,000)

Answer 1

The Lusk Corporation should consider the fixed costs that would still be incurred even if Product X is discontinued to determine the financial advantage or disadvantage of eliminating the product. The annual financial advantage (disadvantage) for the company of eliminating Product X is $40,000.

Step-by-step explanation:

The Lusk Corporation should consider the fixed costs that would still be incurred even if Product X is discontinued in order to determine the financial advantage or disadvantage of eliminating the product.

Currently, the company sells 10,000 units of Product X at a price of $40 per unit, with variable expenses of $32 per unit.

If the product is discontinued, $70,000 of the monthly fixed expenses would not be avoidable.

To calculate the annual financial advantage or disadvantage, multiply the fixed costs that would be saved per month ($120,000 - $70,000) by 12 and compare it to the current losses from Product X sales (10,000 units * ($40 - $32)).

If the annual financial advantage (disadvantage) is positive, it indicates a profit, while a negative value indicates a loss.

Therefore, the annual financial advantage (disadvantage) for the company of eliminating Product X is $40,000.