Question

Lusk corporation produces and sells 20,000 units of product x each month. the selling price of product x is $30 per unit, and variable expenses are $21 per unit. a study has been made concerning whether product x should be discontinued. the study shows that $50,000 of the $250,000 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:

Answer 1

From economics, we know that the formula for Profit is:

Profit = Income – Total Cost

Case 1: Continue producing and selling product x

income is calculated as:

Income = ($30 / unit) * (20, 000 units)

Income = $ 600, 000

Total cost is composed of both the fixed cost and variable cost:

Total cost = Variable cost + Fixed cost

Total cost = ($21 / unit) * (20, 000 units) + $250,000

Total cost = $670, 000

Therefore, the profit of producing and selling product x each month is:

Profit = $ 600, 000 - $670, 000

Profit 1= - $70, 000        (decifit)

 

Case 2: Discontinue producing and selling product x

Since there is no income but there is unavoidable fixed cost of $50,000, therefore:

Profit 2 = - $50, 000       (deficit)

 

The company’s overall net operating income would be the change in profit (deficit in this case):

Net operating income = Profit 2 – Profit 1

Net operating income = - $50, 000 – (- $70, 000)

Net operating income = $20, 000

 

Therefore discontinuing product x would result in an increase in the overall net operating income by $20,000 per month.