The Draper Company is considering dropping its Dream bug toy due to continuing losses. Revenue and cost data on the toy for the past year follow: Sales of 15,000 units P 150,000 Variable expenses 120,000 Contribution margin 30,000 Fixed expenses 40,000 Net operating loss (P 10,000) If the toy were discontinued, then Draper could avoid P8,000 per year in fixed costs.
The Draper Company is considering dropping its Dream bug toy due to continuing losses. Revenue and cost data on the toy for the past year follow:
|
|
Sales of 15,000 units |
P 150,000 |
|
|
Variable expenses |
120,000 |
|
|
Contribution margin |
30,000 |
|
|
Fixed expenses |
40,000 |
|
|
Net operating loss |
(P 10,000) |
If the toy were discontinued, then Draper could avoid P8,000 per year in fixed costs.
1. Under the given conditions, the change in annual operating income from discontinuing the production and sale of Doombugs would be:
A) P 30,000 decrease B) P 10,000 increase C) P 22,000 decrease D) P 18,000 increase
2. Assuming all other conditions stay the same, at what level of annual sales of Doombugs (in units) should Draper be indifferent to discontinuing Doombugs or continuing the production and sale of Doombugs?
A) 20,000 B) 18,000 C) 6,000 D) 4,000
3. Suppose that if the Doombug toy is dropped, the production and sale of other Draper toys would increase so as to generate a P16,000 increase in the contribution margin received from these other toys. If all other conditions are the same, the change in annual operating income from discontinuing the production and sale of Doombugs would be:
A) P 6,000 decrease C) P 2,000 decrease
B) P 14,000 increase D) P 28,000 increase
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