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

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Jenni Velaquez · Accepted Answer

Final Answer : A, Explanation :    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).Reference: CH11-Ref7The management of Woznick Corporation has been concerned for some time with the financial performance of its product V86O and has considered discontinuing it on several occasions.Data from the company's accounting system for this product for last year appear below:   In the company's accounting system all fixed expenses of the company are fully allocated to products.Further investigation has revealed that $30,000 of the fixed manufacturing expenses and $13,000 of the fixed selling and administrative expenses are avoidable if product V86O is discontinued.

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