Reference no: EM133104930

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	$1,803,100
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?