Camera Corner Is Considering Eliminating Model AE2 from Its Camera

question 190

Multiple Choice

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 summarised below:
$$\begin{array} { l r } \text { Sales (1000 units) } & \$ 300000 \\\text { Manufacturing costs: } & \\\text { Direct materials } & 150000 \\\text { Direct labour ( } \$ 15 \text { per hour) } & 60000 \\\quad \text { Overhead } & 100000 \\\text { Operating loss } & \$ 10000 ) \end{array}$$
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 profit will:

• A)increase by $30 000.
• B)decrease by $20 000.
• C)decrease by $10 000.
• D)increase by $10 000.

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Definitions:

Population Growth Rate

The rate at which the number of individuals in a population increases in a given time period, expressed as a fraction of the initial population.

Financial Distress

A situation where a company struggles to meet or has difficulty paying off its financial obligations to creditors.

Agency Costs

Expenses, either direct or indirect, that are borne by a principal as a result of having delegated authority to an agent. An example is the costs borne by shareholders to encourage managers to maximize a firm’s stock price rather than act in their own self-interests. These costs may also arise from lost efficiency and the expense of monitoring management to ensure that debtholders’ rights are protected.

Bankruptcy Costs

Expenses and fees associated with the process of declaring bankruptcy, including legal, administrative, and any potential asset liquidation costs.