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.The annual financial advantage (disadvantage) for the company from discontinuing the production and sale of Doombugs would be:
A) ($30,000)
B) $10,000
C) ($22,000)
D) $18,000

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.The annual financial advantage (disadvantage) for the company from discontinuing the production and sale of Doombugs would be:
A) ($30,000) 
B) $10,000 
C) ($22,000) 
D) $18,000

Quizplus · Accepted Answer

To calculate the annual financial advantage (disadvantage), we need to compare the total revenue generated by selling Doombugs with the total cost of producing and selling Doombugs, including fixed costs.

Total revenue = 10,000 units x $6 per unit = $60,000 
Total variable costs = 10,000 units x $4 per unit = $40,000 
Total fixed costs = $30,000

Total cost = $40,000 + $30,000 = $70,000

Profit/loss = Total revenue - Total cost = $60,000 - $70,000 = ($10,000)

If the toy were discontinued, Draper could avoid $8,000 per year in fixed costs. Therefore, the new total fixed costs would be $22,000.

New profit/loss = Total revenue - Total cost = $60,000 - ($40,000 + $22,000) = ($2,000)

The annual financial disadvantage for the company from discontinuing the production and sale of Doombugs would be ($2,000) or -$2,000. This means that discontinuing the toy would result in a loss of $2,000 per year. Therefore, the best choice is C, to not discontinue the Doombug toy, as it would result in a smaller loss than if it were to be discontinued.

The Draper Corporation Is Considering Dropping Its Doombug Toy Due