Brothers Corp. is considering dropping its talking dog product line due to continuing losses.Revenue and cost data for the talking dog line for the past year follow: Sales (20,000 units)$300,000 Variable costs 180,000 Contribution margin 120,000 Fixed costs 140,000 If the talking dog is discontinued, then Brothers could avoid $110,000 per year in fixed costs.Required:a. What is the change in annual operating income from discontinuing the talking dog product line?b. Assuming all other conditions stay the same, at what level of annual sales of the talking dog (in units) should Brothers be indifferent to discontinuing or continuing the product line?c. Suppose that if the talking dog is dropped, the production and sale of other products would increase so as to generate a $15,000

Question

increase in the contribution margin received from the other products. If all other conditions are the same, what is the change in annual operating income from dropping the talking dog?

What will be an ideal response?

Answer 1

a.
Currently, the talking dog product line has a contribution margin of $120,000 which would be lost if the line is discontinued. Florida would avoid $110,000 in fixed costs, leaving an overall decrease of $10,000 per year. The $30,000 of fixed costs that would continue regardless of what decision is made would be allocated to other products.

b.
The annual level of sales where Brothers would be indifferent is that where the avoidable fixed costs are equal to the contribution margin. $110,000/$6 (contribution margin per unit) = 18,334 (rounded up). At 18,334 units, Brothers would be indifferent as to keeping or dropping the talking dog.

c.
Brothers would lose $10,000 per year from dropping the talking dog product line but gain $15,000 from the new product line. Overall, income would increase by $5,000.