Question

Hughes Corporation produces and sells 10,000 units of perfume each month. The selling price is $40 per unit and its variable expenses are $32 per unit. In considering whether to continue producing the perfume, it was determined that $70,000 of the $120,000 in monthly fixed expenses charged to the perfume division would not be avoidable even if the product was discontinued. If the perfume division is discontinued, what would the annual financial advantage (disadvantage) be for Hughes from eliminating this product?

Answer 1

There will be no advantage as seen in the below table therefore it should be continued.

Particulars	Continued	Discontinued
Sale (10000 x 40)	400,000
Less: Variable Cost (10000 x 32)	320,000
Contribution	80,000	-
Less: Fixed Cost	120,000	70,000
Net Income (Loss)	(40,000)	(70,000)