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3. The Draper Corporation is considering dropping its Doom bug toy due to continuing losses. Data...

3. The Draper Corporation is considering dropping its Doom bug 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.

Suppose that if the Doom bug toy is dropped, the production and sale of other Draper toys would increase 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 Doom bugs would be: Show your work.

Business   Accounting   
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Answer #1
1) Calculation of Financial Advantage / (Disadvantage) of dropping Doom Bug Toy
Loss of Contribution margin on dropping Doom Bug Toy         (30,000)
Saving in Fixed cost              8,000
Increase in contribution margin from other drapper toys           16,000
Financial (Disadvantage)           (6,000)
2) No, Doom Bug Toy should not be dropped
(Because saving of cost is less than loss of contribution)
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