Lusk Company produces and sells 14,300 units of Product X each month. The sellin
ID: 2486349 • Letter: L
Question
Lusk Company produces and sells 14,300 units of Product X each month. The selling price of Product X is $25 per unit, and variable expenses are $19 per unit. A study has been made concerning whether Product X should be discontinued. The study shows that $72,000 of the $102,000 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:
increase by $46,200 per month
increase by $16,200 per month
decrease by $55,800 per month
decrease by $46,200 per month
Explanation / Answer
Therefore, the correct answer is option C.
Compute the increase or decrease in profit if the product is discontinued. Particulars Amount($) Selling Price 25 Less: Variable cost 19 Contribution per unit 6 Number of units 14300 Contribution margin lost 85800 Less: Avoidable Fixed Cost 30000 102000-72000 Decrease in Profit(85800-30000) 55800 Conclusion: The fixed costs amounting to $72,000 would continued even though the product is discontinued Thus, avoidable fixed costs are only 30000 but the contribution lost if the product is discontined is $85,800. Thus, this results in decrease in overall profits of the company by $55,800.Related Questions
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