Lusk Company produces and sells 15,000 units of Product A each month. The sellin

Question

Lusk Company produces and sells 15,000 units of Product A each month. The selling price of Product A is $20 per unit, and variable expenses are $14 per unit. A study has been made concerning whether Product A should be discontinued. The study shows that $70,000 of the $100,000 in fixed expenses charged to Product A would continue even if the product was discontinued. These data indicate that if Product A is discontinued, the company's overall net operating income would:

decrease by $20,000 per month

Explanation / Answer

D.Decrease by $60,000 per month.

It can be seen from above table that dropping of product will result in a difference of $60,000 i.e overall profuts will further decrease by $60,000.

Item Existing If product is dropped Difference Sales ($20 *15,000) $300,000 nil - $300,000 less: varialble costs ($14*15,000) ($210,000) nil $210,000 less: fixed costs ($100,000) $70,000 $30,000 total loss ($10,000) ($70,000) ($60,000)

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