Question

Camera Corner is considering eliminating Model AE2 from its camera line because of losses over the past quarter. The past three months of information for Model AE2 are summarized below: Sales (1,000 units) $300,000 Manufacturing costs: Direct materials 150,000 Direct labor ($15 per hour) 60,000 Overhead 100,000 Operating loss ($10,000) Overhead costs are 70% variable and the remaining 30% is depreciation of special equipment for model AE2 that has no resale value. If Model AE2 is dropped from the product line, operating income will:

Answer 1

Answer:

It will decrease by $20,000.

Explanation:

In this exercise the resolution is:

$300,000 –$150,000 –$60,000 –$70,000 = $20,000  

This product contributes $20,000 toward corporate profits, therefore, discontinuing this product will decrease operating income by $20,000.