Question

Lusk Corporation produces and sells 14,900 units of Product X each month. The selling price of Product X is $31 per unit, and variable expenses are $25 per unit. A study has been made concerning whether Product X should be discontinued. The study shows that $73,000 of the $113,000 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: g

Answer 1

To determine the annual financial advantage or disadvantage of discontinuing Product X, we calculate the contribution margin and subtract the avoidable fixed costs. The resulting financial disadvantage is $592,800 annually, indicating that discontinuing the product would not be beneficial.

Step-by-step explanation:

When analyzing whether to discontinue Product X, we need to consider the contribution margin and the fixed costs that can be avoided. The contribution margin is calculated by subtracting variable costs from the selling price. For Product X, this would be $31 (selling price) minus $25 (variable cost), resulting in a contribution margin of $6 per unit. The monthly contribution margin for Product X is $6 times 14,900 units, which equals $89,400.

The fixed costs that would be avoided if Product X were discontinued amount to $113,000 minus $73,000 (unavoidable fixed costs), which is $40,000. Since discontinuing the product will eliminate the contribution margin, but will only reduce the fixed costs by $40,000, the annual financial disadvantage of eliminating Product X would be the total contribution margin lost ($89,400 per month) minus the fixed costs saved ($40,000 per month) over 12 months. This calculation results in an annual financial disadvantage of ($89,400 - $40,000) multiplied by 12, equaling $592,800 annually.