Kahn Corporation (a multi-product company) produces and sells 8,000 units of Product X each year. Each unit of Product X sells for $10 and has a contribution margin of $6. If Product X is discontinued, $50,000 of the $60,000 in annual fixed costs charged to Product X could be eliminated. The annual financial advantage (disadvantage) for the company of eliminating this product should be:
A) $2,000
B) ($2,000)
C) $12,000
D) ($12,000)

Question

Quizplus · Accepted Answer

If Product X is discontinued, the company will lose $48,000 in sales revenue (8,000 units x $6 contribution margin). However, the company will also save $50,000 in fixed costs. Therefore, the annual financial advantage of eliminating Product X is $2,000 ($50,000 - $48,000).

Kahn Corporation (A Multi-Product Company) Produces and Sells 8,000 Units