Question

Vandelay Company produces and sells 15,000 units of Product X1 each month. The selling price of Product X1 is $20 per unit, and variable expenses are $14 per unit. A study has been made concerning whether Product X1 should be discontinued. The study shows that $70,000 of the $100,000 in fixed expenses charged to Product X1 would remain even if the product was discontinued. These data indicate that if Product A is discontinued, the company's overall net operating income would: _________

a. decrease by $60,000 per month
b. increase by $10,000 per month
c. increase by $20,000 per month
d. decrease by $20,000 per month

Answer 1

Effect on income= $60,000 decrease

Step-by-step explanation:

Giving the following information:

Current contribution margin= 15,000*(20 - 14)

Current contribution margin= $90,000

The study shows that $70,000 of the $100,000 in fixed expenses charged to Product X1 would remain even if the product was discontinued.

To calculate the effect on income, we need to use the following formula:

Effect on income= avoidable fixed costs - total contribution margin

Effect on income= 30,000 - 90,000

Effect on income= $60,000 decrease