Question

Lusk Corporation produces and sells 16,200 units of Product X each month. The selling price of Product X is $32 per unit, and variable expenses are $26 per unit. A study has been made concerning whether Product X should be discontinued. The study shows that $72,000 of the $112,000 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:

Multiple Choice

• ($57,200)

• $14,800

• $54,800

• ($54,800)

Answer 1

Correct answer----------($57,200).

.

If the Product X is discontinued then the loss will increase from $14800 to $72000. The loss will increase by $57200 as shown below

	Before discontinue	After Discontinue	Change in net income
Sales	$    518,400.00
Variable Costs	$    421,200.00
Contribution Margin	$        97,200.00	$                     -
Fixed Expenses	$    112,000.00	$      72,000.00
Net Operating Income	$      (14,800.00)	$    (72,000.00)	$    (57,200.00)