22. Lusk Company produces and sells 16,100 units of Product X each month. The se

Question

22.

Lusk Company produces and sells 16,100 units of Product X each month. The selling price of Product X is $31 per unit, and variable expenses are $25 per unit. A study has been made concerning whether Product X should be discontinued. The study shows that $71,000 of the $111,000 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:

decrease by $56,600 per month

increase by $14,400 per month

increase by $54,400 per month

decrease by $54,400 per month

Lusk Company produces and sells 16,100 units of Product X each month. The selling price of Product X is $31 per unit, and variable expenses are $25 per unit. A study has been made concerning whether Product X should be discontinued. The study shows that $71,000 of the $111,000 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:

Explanation / Answer

Contribution margin per unit = $31 - $25 = $6 per unit

Avoidable fixed expenses = $111,000 - $71,000 = $40,000

If product X is discontinued,

Contribution margin lost = $6* 16,100 units = $96,600

Savings in fixed expenses = $40,000

Decrease in net operating income = $96,600 - $40,000 = $56,600

Hence. Overall net operating income would decrease by $56,600 per month

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