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Unformatted text preview: 158 1521 (continued) (2) Sales (6,000 @ $25) $150,000 Costs avoidable by discontinuing: Variable manufacturing and selling costs (6,000 @ $1 7) $102,000 Fixed costs 45,000 Additional advertising 10,000 (157 ,000) Loss on scooter sales (over the alternative of discontinuing) $ (7 ,000) Note to Instructor: Students also can arrive at this result incrementally . If Porter Wagon can increase its sales by 1 ,000 scooters (from 5,000 to 6,000 scooters), it will increase its total contribution margin by $8,000 ($8 per scooter x 1 ,000 scooters). But, the increased sales result from the $10,000 additional advertising. So, Porter Wagon would end up decreasing profit by $2,000. Currently , Porter Wagon has a loss of $5,000 (a contribution margin of $40,000 fixed costs of $45,000). By increasing advertising and sales, Porter Wagon will end up with a $7 ,000 loss. Scooter production should not be continued. (3) Sales (7 ,000 @ $20) $140,000 Costs avoidable by discontinuing: Variable manufacturing and selling costs (7 ,000 @ $1 7) $119,000 Fixed costs 45,000 (1 64,000) Loss on scooter sales (over the alternative of discontinuing) $(24,000) Note to Instructor: Students also can arrive at this result by looking at the effect of changing the selling price. If, Porter Wagon can sell 7 ,000 scooters by reducing its selling price to $20 per scooter , it will reduce its contribution margin to $21 ,000 ($3 per scooter x 7 ,000 scooters). Since it still will have $45,000 fixed costs, it will have a loss of $24,000 with this alternative. Scooter production should not be continued. ...
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 Fall '07
 Drucker

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