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

11ea7761_1608_f4ed_81a5_99aed59dae9a_TB2580_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