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: $\begin{array}{lr}
\text { Sales (1,000 units) } & \$ 300,000 \
\text { Manufacturing costs: } & \
\quad \text { Direct materials } & 150,000 \
\quad \text { Direct labor ( } \$ 15 \text { per hour) } & 60,000 \
\quad \text { Overhead } & 100,000 \
\text { Operating loss } & (\$ 10,000)
\end{array}$ 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 ________.
A) increase by $10,000
B) decrease by $20,000
C) increase by $30,000
D) decrease by $10,000

Question

Quizplus · Accepted Answer

If Model AE2 is dropped, the company will save the variable portion of the overhead costs and the direct costs, but will lose the contribution margin. The fixed overhead (depreciation) will still be incurred. The net effect is a decrease in operating income by $20,000.

Camera Corner Is Considering Eliminating Model AE2 from Its Camera