Question

Lusk 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 should be: ($30,000) $30,000 $40,000 ($40,000) Part 2: In a special order situation that involves using capacity that is not idle, opportunity costs are zero. True False

Answer 1

Answer:

Part 1  There will be a disadvantage for 30,000 as there are allocated cost into product X

Part 2 TRUE

As performing the order will not renounce to selling in the local market. When the order comiptes with the normal capacity(there is no idlbe capacity to use) it will have as opportunity cost the contribution if sold in the local market.

Explanation:

$\left[\begin{array}{cccc} & Current& Discontinued& Differential\\ Revenues&400,000&&-400,000\\ variables&-320,000&&320,000\\ Contribution&80,000&&-80,000\\ avoidable fixed cost&-50,000&&50,000\\ allocate fixed&-70,000&-70,000&\\ Result&-40,000&-70,000&-30,000\\\end{array}\right]$

Revenue 10,000 x 40 = 400,000

Variable Cost: 100,000 x 32 = 320,000

Avoidable: 120,000 - 70,000 = 50,000