Question

Lusk Corporation produces and sells 14,800 units of Product X each month. The selling price of Product X is $30 per unit, and variable expenses are $24 per unit. A study has been made concerning whether Product X should be discontinued. The study shows that $74,000 of the $112,000 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:

Answer 1

The income will decrease by $50,800

Step-by-step explanation:

Giving the following information:

Product X:

Sales= 14,800*30= 444,000

Variable costs= 14,800*24= (355,200)

Contribution margin= 88,800

Fixed costs= (112,000)

Net income= (23,200)

The study shows that $74,000 of the $112,000 in monthly fixed expenses charged to Product X would not be avoidable even if the product was discontinued.

Now, we need to calculate the effect on income if Product X is discontinued.

Effect on income= net income - unavoidable fixed costs

Effect on income= 23,200 - 74,000= -50,800

The income will decrease by $50,800