The following information pertains to Dodge Company's three products: $\begin{array}{lrrr}
&\text {A}&\text {B}&\text {C}\
\text { Unit sales per year } & \underline{250} & \underline{400} & \underline{250} \\
\text { Selling price per unit } & \$ 9.00 & \$ 12.00 & \$ 9.00 \
\text { Variable costs per unit } & \underline{3.60} & \underline{\$ 5.00} & \underline{9.90} \
\text { Unit contribution margin } &\$5.40&\$3.00&\$(0.90)\
\text { Contribution margin ratio } &60\%&25\%&(10)\%
\end{array}$ Assume that product C is discontinued and the extra space is rented for $300 per month.All other information remains the same as the original data.What will be the effect on annual profits?

Question

The following information pertains to Dodge Company's three products: $\begin{array}{lrrr}
&\text {A}&\text {B}&\text {C}\
\text { Unit sales per year } & \underline{250} & \underline{400} & \underline{250} \\
\text { Selling price per unit } & \$ 9.00 & \$ 12.00 & \$ 9.00 \
\text { Variable costs per unit } & \underline{3.60} & \underline{\$ 5.00} & \underline{9.90} \
\text { Unit contribution margin } &\$5.40&\$3.00&\$(0.90)\
\text { Contribution margin ratio } &60\%&25\%&(10)\%
\end{array}$  Assume that product C is discontinued and the extra space is rented for $300 per month.All other information remains the same as the original data.What will be the effect on annual profits?

Quizplus · Accepted Answer

Discontinuing product C removes its negative contribution to profit, which is $0.90 per unit for 250 units annually, totaling a loss of $225. Renting the extra space adds $300 per month, or $3,600 annually. The net effect is an increase in profit of $3,600 - $225 = $3,375 annually, not an option provided. However, given the choices, the closest incorrect option is chosen for explanation purposes.

The Following Information Pertains to Dodge Company's Three Products Assume That Product C Is Discontinued and the Extra Space