Question

Lusk Corporation produces and sells 14,100 units of Product X each month. The selling price of Product X is $23 per unit, and variable expenses are $17 per unit. A study has been made concerning whether Product X should be discontinued. The study shows that $74,000 of the $104,000 in fixed expenses charged to Product X would not be avoidable even if the product was discontinued. If Product X is discontinued, the company’s overall net operating income would:
a. decrease by $54,600 per month
b. increase by $19,400 per month
c. increase by $49,400 per month
d. decrease by $49,400 per month

Answer 1

Answer:

Option A

Decrease by $54,600 per month

Explanation:

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

The relevant costs of this decision to dis includes discontinue he following:

                                                                                             $

1. The contribution lost (23-17) × 14,100 =                    (84600 )

2. savings in the avoidable fixed cost

(104,000 - 74,000)                                                        30000                                          

The net loss from decision                                          (54,600 )

If product  is discontinued, Lusk Corporation net income will be reduced by $54,600

Note that we did not consider the allocated fixed cost of $74,000 because they would be incurred either way. And therefore they are not relevant for this decision