The Draper Corporation is considering dropping its Doombug toy due to continuing losses. Data on the toy for the past year follow: 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 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:
A) ($6,000)
B) $14,000
C) ($2,000)
D) $28,000

Question

The Draper Corporation is considering dropping its Doombug toy due to continuing losses. Data on the toy for the past year follow:  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 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:
A) ($6,000) 
B) $14,000 
C) ($2,000) 
D) $28,000

Quizplus · Accepted Answer

11eacbfc_c63e_4bfd_8ffe_8f9a2f790ad0_TB7552_00 However, even though the nominal profit from Doombugs is $22,000, dropping the product would increase the contribution margin received from other toys by $16,000. Therefore, the net effect on net operating income would be a $6,000 decrease (−$22,000 + $16,000).

The Draper Corporation Is Considering Dropping Its Doombug Toy Due