From economics, we know that the formula for Profit is:
Profit = Income – Total Cost
Case 1: Continue producing and selling product x
income is calculated as:
Income = ($30 / unit) * (20, 000 units)
Income = $ 600, 000
Total cost is composed of both the fixed cost and variable cost:
Total cost = Variable cost + Fixed cost
Total cost = ($21 / unit) * (20, 000 units) + $250,000
Total cost = $670, 000
Therefore, the profit of producing and selling product x each month is:
Profit = $ 600, 000 - $670, 000
Profit 1= - $70, 000 (decifit)
Case 2: Discontinue producing and selling product x
Since there is no income but there is unavoidable fixed cost of $50,000, therefore:
Profit 2 = - $50, 000 (deficit)
The company’s overall net operating income would be the change in profit (deficit in this case):
Net operating income = Profit 2 – Profit 1
Net operating income = - $50, 000 – (- $70, 000)
Net operating income = $20, 000
Therefore discontinuing product x would result in an increase in the overall net operating income by $20,000 per month.
