70. Brewer 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) Variable costs Contribution margin Fixed costs $300,000 180,000 120,000 140,000 If the talking dog is discontinued, then Brewer could avoid $110,000 per year in fixed costs. Required: (1) What is the change in annual operating income from discontinuing the talking dog product line? (2) Assuming all other conditions stay the same, at what level of annual sales of the talking dog (in units) should Brewerbe indifferent at to discontinuing or continuing the product line? (3) Suppose that if the talking dog is dropped, the production and sale of other products would increase so as to generate a $15,000 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? Answer: (1) An overall decrease of $10,000 per year. Currently, the talking dog has a net loss of $20,000, but $30,000 of fixed costs would continue regardless of what decision is made. The $30,000 would be allocated to other products. (2) The annual level of sales where Brewer would be indifferent is that where the avoidable fixed costs are equal to the contribution margin. $110,000/S6 (contribution margin per unit) - p). At 18,334 units, Brewer would be indifferent as to keeping or dropping the talking dog. (3) Brewer 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