Question

Suppose that if the Doombug toy is dropped, the production and sale of other Draper toys would increase so as to generate a $16,000 increase in the contribution margin received from these other toys. If all other conditions are the same, the change in annual operating income from discontinuing the production and sale of Doombugs would be:
A) $6,000 decrease
B) $14,000 increase
C) $2,000 decrease
D) $28,000 increase

Answer 1

Answer:

The correct option is A

Explanation:

Contribution Margin = Sales - Variable expense

                                  = $150,000 - $120,000

                                  = $30,000

Doombug's Profit Margin = Avoidable fixed expenses -  Contribution Margin

                                          = $8,000 - $30,000

                                          = ($22,000)

Increase or Decrease in net operating income = Additional contribution margin - Doombug's Profit Margin

= $16,000 - ($22,000)

= ($6,000)

Therefore, there is decrease in net operating income of Doombug. So, there is decrease of $6,000.