Ace Computers (AC)is a Manufacturer

question 23

Multiple Choice

Ace Computers (AC) is a manufacturer.It entered into a contract with a retailer,Reliable Computer (RC) for the sale of 100 new XYZ model computers at $1,000 each,for delivery in 6 months.AC would thus make a profit of $50,000.Six months later however,the XYZ model has become almost relatively obsolete;its market price is only $600 at that time.RC refuses to accept or pay for those computers.If AC sues,how much should it be entitled to in damages? (Ignore any incidental expenses or cost savings to AC. )

• A) Nothing;when the XYZ model became almost obsolete,this excused RC from the contract.
• B) $50,000,the profit AC would have made had RC not breached the contract.
• C) $40,000,the difference between market price and contract price.
• D) $90,000,the lost profit plus the difference between market price and contract price.

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Definitions:

Contribution Margin

The amount remaining from sales revenue after variable costs have been deducted, indicating the capacity to cover fixed costs and generate profit.

Fixed Costs

Costs that do not vary with the level of production or sales within a certain range, such as rent, salaries, and insurance.

Variable Cost

A cost that varies with the level of output or activity, such as materials and labor costs.

Operating Leverage

A financial ratio that measures the degree to which a firm or project can increase operating income by increasing revenue.