playpal ltd considering dropping its doomdrum toy due continuing losses revenue and cost dat

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?
 

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