Question

The Draper Corporation is considering dropping its Doombug toy due to continuing losses. Data on the toy for the past year follow:
Sales of 15,000 units $ 150,000 Variable expenses 120,000 Contribution margin 30,000 Fixed expenses 40,000 Net operating loss $ (10,000 ) If the toy were discontinued, Draper could avoid $8,000 per year in fixed costs. The remainder of the fixed costs are not avoidable. Assuming all other conditions stay the same, at what level of annual sales of Doombugs (in units) should Draper be indifferent between discontinuing Doombugs or continuing the production and sale of Doombugs?

Answer 1

Answer:

The Draper Corporation would be indifferent between continuing and discontinuing of Doombugs at 20,000 units.

Explanation:

The draper should be indifferent at the level at which they covered all of their Fixed Cost.

The sales price per unit is ⇒ 150,000/15,000 = 10 per unit

The Variable cost per unit is ⇒ 120,000/15,000 = 8 per unit

The Break-even units for Draper should be:

Break-even units =            Fixed Cost              

                                Sale price - Variable Cost

Break-even units = 40,000

                                 10-8

Break-even units = 40,000

                                    2

Break-even units = 20,000 units