Question

The Draper Company is considering dropping its Doombug toy due to continuing losses. Revenue and costs data on the toy for the past year follow: Sales of 15,000 units $150,000 less Variable expenses $120,000 = Contribution margin $30,000 less Fixed expenses $40,000 = Net operating loss ($10,000) If the toy were discontinued, then Draper could avoid $8,000 per year in fixed costs. Under the given conditions, the change in annual operating income from discontinuing the production and sale of Doombugs would be:
A. $30,000 decrease
B. $10,000 increase
C. $22,000 decrease
D. $18,000 increase

Answer 1

Answer:

Effect on income= -$22,000 decrease

Explanation:

Giving the following information:

Contribution margin $30,000

Fixed expenses ($40,000)

Net operating loss ($10,000)

If a product line provides a positive contribution margin, generally it is convenient to continue production, at least in the short term.

Effect on income= avoidable fixed costs - contribution margin

Effect on income= 8,000 - 30,000

Effect on income= -$22,000 decrease