Question

Lusk company produces and sells 15,900 units of product a each month. the selling price of product a is $29 per unit, and variable expenses are $23 per unit. a study has been made concerning whether product a should be discontinued. the study shows that $71,000 of the $109,000 in fixed expenses charged to product a would continue even if the product was discontinued. these data indicate that if product a is discontinued, the company's overall net operating income would:

Answer 1

Decrease by $57,400 per month. Looks look at the cash flow for continuing to produce product a and discontinuing product a. Continuing to produce Income = 15900 * $29 = $461,100 Variable Expenses = 15900 * 23 = $365,700 Fixed overhead = $109,000 Total cash flow = $461,100 - $365,700 - $109,000 = -$13,600 So the Lusk company is losing $13,600 per month while producing product a. Let's see what happens if they stop producing it. Income = $0 Variable Expenses = $0 Fixed overhead = $71,000 Total cash flow = $0 - $71,000 = -$71,000 So if they stop producing it, their fixed overhead decreases, but is still at $71,000 per month, for a total loss per month of $71,000. The conclusion is to either lose $13,600 per month, or $71,000 per month. So if they stop production of product a, their loss per month will increase by $57,400.