Seidman Company manufactures and sells 30,000 units of product X per month.Each unit of product X sells for $16 and has a contribution margin of $7.If product X is discontinued,$85,000 in fixed monthly overhead costs would be eliminated and there would be no effect on the sales volume of Seidman Company's other products.If product X is discontinued,Seidman Company's monthly income before taxes should:
A)Increase by $210,000.
B)Increase by $125,000.
C)Decrease by $210,000.
D)Decrease by $125,000.

Question

Quizplus · Accepted Answer

Currently, Seidman Company sells 30,000 units of product X per month at a contribution margin of $7 per unit for a total contribution margin of 30,000 x $7 = $210,000 per month.
If product X is discontinued, the fixed overhead costs of $85,000 per month would be eliminated, but the total contribution margin would be lost as well. Thus, the total decrease in monthly income before taxes would be $210,000 - $85,000 = $125,000. Therefore, the correct answer is D) Decrease by $125,000.

Seidman Company Manufactures and Sells 30,000 Units of Product X