Question

Lusk Company produces and sells 16,100 units of Product A each month. The selling price of Product A is $31 per unit, and variable expenses are $25 per unit. A study has been made concerning whether Product A should be discontinued. The study shows that $71,000 of the $111,000 in fixed expenses charged to Product A would continue even if the product was discontinued. These data indicate that if Product A is discontinued, the company's overall net operating income would:


decrease by $54,400 per month

increase by $14,400 per month

decrease by $56,600 per month

increase by $54,400 per month

Answer 1

Answer:

decrease by $56,600 per month

Explanation:

The impact on the net operating income would be shown below:

In the first case,

Sales ( $31 × 16,100 units) = $499,100

Variable expenses ($25 × 16,100 units) = - $402,500

Fixed expenses = - $111,000

Net loss = - $14,400

And, the fixed cost not avoidable cost is $71,000

So, the net income decreased by

= $71,000 - $14,400

= $56,600

if the product A is discontinued