8 Lusk Corporation produces and sells 10,000 units of Product X each month. The

Question

8 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 eliminating this product should be: was discontinued.If Product X is discontinued, the annual financial advantage (disadvantage) for the company of 01 38 10

Explanation / Answer

Solution:

sales = 10000 units

Contribution margin = $40 - $32 = $8 per unit

If Product discontinued, Loss of Contribution margin = Sales units *Contribution margin = 10000*$8 = $80,000

If Product discontinued, Benefit of avoidable fixed expense = Total Fixed Expense - Unavoidable fixed expense = $120,000 - $70,000 = $50,000

Net Financial advantage (disadvantage) if product is discontinued = Benefit of Avoidable fixed expense -  Loss of contribution margin

= $50,000 - $80,000

= ($30,000)

Hence second option is correct.

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