Lusk Corporation produces and sells 15,200 units of Product X each month. The se
ID: 2601678 • Letter: L
Question
Lusk Corporation produces and sells 15,200 units of Product X each month. The selling price of Product X is $22 per unit, and variable expenses are $16 per unit. A study has been made concerning whether Product X should be discontinued. The study shows that $73,000 of the $102,000 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:
Explanation / Answer
Current Net Income
Contribution per unit
= Selling price per unit – Variable costs per unit
= $22 - $16
= $6 per unit
Total contribution
= Contribution per unit x Number of units
= $6 x 15,200
= $91,200
Net Income
= Contribution – Fixed costs
= $91,200 - $102,000
= - $10,800
Now, as $73,000 of the fixed expenses could not be avoided, they have to be incurred even if the product is not produced
As the product will be discontinued, there will be no sales and no contribution but fixed costs of $73,000 will still have to be incurred
So, Net Income
= Contribution – Fixed costs
= 0 - $73,000
= - $73,000
So, Annual financial disadvantage
= Monthly financial disadvantage x Number of months in a year
= (New Net income – Old Net Income) x 12
= ( - $73,000 – ($10,800)) x 12
= - $746,400 that is a loss of $746,400 annually
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