L Corporation produces and sells 13,800 units of Product X each month. The selling price of Product X is $20 per unit, and variable expenses are $14 per unit. A study has been made concerning whether Product X should be discontinued. The study shows that $73,000 of the $103,000 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:

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TomShelby TomShelby · Answer 1 · 2019-08-28T15:17:00+02:00

Answer:

It will be a financial disadvantage of 52,800

Explanation:

Continued Discontinued Differential

Sales 276000 - -276,000

Variable -193,200 - 193,200

Fixed -30,000 - 30,000

Allocate cost -73000 -73000 -

Result - 20,200 -73,000 -52,800

We compare each alternative:

if discontinued only the allocate cost will remain.

but we also loss the contribution of the product sales.

Sales 13,800 x 20

Variable 13,800 x 14

Tracable Fixed total fixed cost - unavoidable fixed cost

103,000 - 73,000 = 30,000

Allocate 73,000

Once we got the number we plug into the table and calcualte the differential income.