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 financial advantage (disadvantage) from discontinuing the production and sale of Doombugs would be:

Answer 1

Answer:

$6,000 Decrease

Explanation:

Sales$150,000

Calculation to determine the financial advantage (disadvantage) from discontinuing the production and sale of Doombugs would be:

First step is to calculate the Profit from Doombugs

Sales 150,000

Less Variable expenses 120,000

Contribution margin 30,000

Avoidable fixed expenses 8,000

Profit from Doombugs $22,000

Now let calculate the financial advantage (disadvantage)

Financial advantage (disadvantage)=-$22,000+$16,000

Financial advantage (disadvantage)=-$6,000 Decrease

Therefore the financial advantage (disadvantage) from discontinuing the production and sale of Doombugs would be:$6,000 Decrease