PlayPal Ltd. is considering dropping its DoomDrum toy due to the continuing losses. Revenue and cost data on the toy for…
PlayPal Ltd. is considering dropping its DoomDrum toy due to the continuing losses.
Revenue and cost data on the toy for the past year follow:
Sales of 15,000 units £150,000
Variable expenses £120,000
Contribution margin £30,000
Fixed expenses £40,000
Net operating loss (£10,000)
If the toy were discontinued, PlayPal Ltd. could avoid £8,000 per year in fixed costs.
Requirement
A. Under the above conditions, compute the change in annual operating income deriving
from the choice of discontinuing the production and sale of DoomDrum.
10 Marks
B. Assuming all other conditions stay the same, at what level of annual sales of DoomDrum
(in units) should PlayPal Ltd. be indifferent to discontinuing or continuing the production
and sale of DoomDrum? Why? Comment on your results.
15 Marks
C. Suppose that if the DoomDrum toy is dropped, the production and sale of other PlayPal
Ltd.’s toys would increase so as to generate a £16,000 increase in the contribution
margin received from these other toys. Compute the change in annual operating income
from discontinuing the production and sale of DoomDrum if all the other conditions stay
the same.
10 Marks
D. Suppose again that if the DoomDrum toy is dropped, the production and sale of other
PlayPal Ltd.’s toys would increase so as to generate a £16,000 increase in the
contribution margin received from these other toys. At what selling price per DoomDrum
should PlayPal Ltd. be indifferent (on economic grounds) between dropping the
DoomDrum or continuing its production and sale (all other conditions remain the same)?
What other qualitative factors might affect this decision?
Revenue and cost data on the toy for the past year follow:
Sales of 15,000 units £150,000
Variable expenses £120,000
Contribution margin £30,000
Fixed expenses £40,000
Net operating loss (£10,000)
If the toy were discontinued, PlayPal Ltd. could avoid £8,000 per year in fixed costs.
Requirement
A. Under the above conditions, compute the change in annual operating income deriving
from the choice of discontinuing the production and sale of DoomDrum.
10 Marks
B. Assuming all other conditions stay the same, at what level of annual sales of DoomDrum
(in units) should PlayPal Ltd. be indifferent to discontinuing or continuing the production
and sale of DoomDrum? Why? Comment on your results.
15 Marks
C. Suppose that if the DoomDrum toy is dropped, the production and sale of other PlayPal
Ltd.’s toys would increase so as to generate a £16,000 increase in the contribution
margin received from these other toys. Compute the change in annual operating income
from discontinuing the production and sale of DoomDrum if all the other conditions stay
the same.
10 Marks
D. Suppose again that if the DoomDrum toy is dropped, the production and sale of other
PlayPal Ltd.’s toys would increase so as to generate a £16,000 increase in the
contribution margin received from these other toys. At what selling price per DoomDrum
should PlayPal Ltd. be indifferent (on economic grounds) between dropping the
DoomDrum or continuing its production and sale (all other conditions remain the same)?
What other qualitative factors might affect this decision?
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