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:

Answer 1

Answer:

There is a financial disadvantage of ($30,000).

Explanation:

The discontinuity of product X would result in the contribution lost.

Sales that would be lost = $40 × 10,000 units = $400,000

Relevant variable cost with the production of product X that would be saved = $32 × 10,000 units = $320,000

Contribution lost = Sales lost - Variable cost saved

Contribution lost = $400,000 - $320,000

Contribution lost = $80,000

Saving in fixed costs = $120,000 - $70,000 (this would not be incurred) = $50,000

However, still contribution lost is more than the saving in fixed costs

Therefore, the financial disadvantage = $80,000 - $50,000 = ($30,000)