A net loss of $60,000 was reported for Product X of the Round Manufacturing Comp

Question

A net loss of $60,000 was reported for Product X of the Round Manufacturing Company for the past year. This loss was computed as follows: Sales $300,000 Variable Costs (120,000) Fixed Costs (240,000) Net Loss $(60,000) Because of the loss, Round is considering discontinuing Product X. The Cost Accounting Department estimates that 60% of Product X's fixed costs are avoidable and 40% are unavoidable. If Product X is discontinued, how will Round's total profit change?

Select one: a. Decrease by $60,000 b. Increase by $60,000 c. Increase by $24,000 d. Decrease by $36,000

Explanation / Answer

d. Decrease by $36,000 ,

If Product X is continued Product X is discontinued

Sales $300000 0

less: variable cost ($120000) 0

Contribution margin $180000 $0

less: Fixed cost (40% ($240000) ($96000)

Net loss ($60000) ($96000)

If Product X is discontinued,Round's total profit change = Decrease in profit by [$96000 - $60000]

= Decrease in profit by $36000

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