Analyzing the Effect of Dropping a Product on Income
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1. 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:
$30,000 decrease
$10,000 increase
$22,000 decrease
$18,000 increase
2. The management of Bonga Corporation is considering dropping product D74F. Data from the company's accounting system appear below:
Sales $830,000
Variable expenses $390,000
Fixed manufacturing expenses $266,000
Fixed selling and administrative expenses $232,000
All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $111,000 of the fixed manufacturing expenses and $103,000 of the fixed selling and administrative expenses are avoidable if product D74F is discontinued.
According to the company's accounting system, what is the net operating income earned by product D74F?
($58,000)
($440,000)
$58,000
$440,000
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Solution Summary
Solution calculates the change in operating income if a product is dropped.
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1. 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, ...
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- MSc (Hons) , Birla Institute of Technology and Science, India
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