Question

Lusk Corporation produces and sells 14,300 units of Product X each month. The selling price of Product X is $25 per unit, and variable expenses are $19 per unit. A study has been made concerning whether Product X should be discontinued. The study shows that $72,000 of the $102,000 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

Answer 1

Annual financial disadvantage = $ (669,600)

Step-by-step explanation:

Relevant cost are future incremental cash costs that arise as a direct consequence of a decision.

The relevant costs of this decision to disconnected includes the following:

1. The variable cost of making the product = $19 per unit
2. Sales revenue at a price of $25
3. Savings in avoidable fixed costs (102,000-72,000) = 30,000

Annual financial advantage

$

Lost contribution $(25-19)× 4,300 units = (85,800)

Saving in fixed cost = 30,000

Monthly net loss 55,800

Annual financial disadvantage

Monthly net loss × 12 months

= (55,800) × 12

= $ (669,600)