Question

Lusk Company produces and sells 15,200 units of Product X each month.The selling price of Product X is $22 per unit, and variable expenses are $16 per unit.A study has been made concerning whether Product X should be discontinued.The study shows that $73,000 of the $102,000 in fixed expenses charged to Product X would continue, even if the product was discontinued.These data indicate that if Product X is discontinued, the company's overall net operating income would :1. decrease by $62,200 per month2. increase by $10,800 per month3. increase by $39,800 per month4. decrease by $39,800 per month

Answer 1

Answer:

1. decrease by $62,200 per month

Explanation:

Fixed Cost savings (FC) from discontinuing product A = $102,000 - $73,000  = $29,000

Variable Cost of 15,200 of product A:

$VC = 15,200* \ 16 = \ 243,200$

Revenue from selling 15,200 units of product A:

$R = 15,200* \ 22 = \ 334,400$

The change in net income is:

$\Delta N=FC+VC-R\\\Delta N=\ 29,000+\ 243,200-\ 334,400\\\Delta N=-\ 62,200$

The company's overall net operating income would decrease by $62,200 per month