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8 September, 14:23

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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  1. 8 September, 15:05
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    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.
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