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Question - Ivanhoe Toys' management is considering eliminating product A, which has been showing a loss for several years. The company's annual income statement, is as follows:
A
B
C
Total
Sales
$2,204,000
$1,405,000
$1,803,100
$5,412,100
Variable expenses
1,618,000
600,100
1,099,600
3,317,700
Contribution margin
$586,000
$804,900
$703,500
$2,094,400
Advertising expense
$523,000
$430,000
$520,000
$1,473,000
Depreciation expense
15,300
10,700
21,900
47,900
Corporate expenses
93,700
81,500
107,000
282,200
Total fixed expenses
$632,000
$522,200
$648,900
Operating income
$(46,000)
$282,700
$54,600
$291,300
Advertising expense - Specific to each product.
Depreciation expense - Specific to each product; no other use available, no resale value.
Corporate expenses - Allocated based on number of employees.
Required -
a) What would be the effect on income if product A were dropped?
b) Management is considering making a new product using product A's equipment. If the new product's selling price per unit were $10, its variable costs were $5, and its advertising costs were the same as for product A, how many units of the new product would the company have to sell to make the switch from product A to the new product worthwhile?
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