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 was discontinued. If Product X is discontinued, the monthly financial advantage (disadvantage) for the company of eliminating this product should be:
A) ($30,000)
B) $30,000
C) $40,000
D) ($40,000)

Question

Quizplus · Accepted Answer

The monthly financial disadvantage of discontinuing Product X is calculated as follows: The contribution margin per unit is $8 ($40 selling price - $32 variable expenses). For 10,000 units, this amounts to $80,000. If the product is discontinued, $70,000 of fixed expenses would remain, leading to a net disadvantage of $30,000 ($80,000 - $70,000).

Lusk Corporation Produces and Sells 10,000 Units of Product X