Question

Lost A Friend Corporation produces and sells 10,000 units of Product X each month. The selling price of Product X is $40 per unit, and variable expenses are $32 per unit. A study has been made concerning whether Product X should be discontinued. The study shows that $70,000 of the $120,000 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 would be: a. ($30,000) b. $30,000 c. ($40,000) d. $40,000 e. None of the above

Answer 1

Answer:

a. ($30,000)

Explanation:

Keep Product X

Sales (10,000 units × $40 per unit) $400,000

Variable expenses (10,000 units × $32 per unit) $ 320,000

Contribution margin ($400,000-$320,000) $80,000

Fixed expenses $120,000

Financial advantage (disadvantage)$ (40,000)

Drop product X

Sales $0

Variable expenses $0

Contribution margin $0

Fixed expenses $70,000

Financial advantage (disadvantage)$ (70,000)

DIFFERENCE (Keep product X -Drop Product X)

Sales ($400,000)

Variable expenses $320,000

Contribution margin ($80,000)

Fixed expenses $50,000

Financial advantage (disadvantage)$ (30,000)