CMA Study Group

camera manufacturing company is considering eliminating Model XP5 from its camera line because of losses over the past quarter. The past quarter's financial information for Model XP5 is shown below.

Sales (1,000 units) $600,000 Manufacturing costs: Direct materials 300,000 Direct labor ($15 per hour) 120,000 Overhead 200,000 Operating loss $ (20,000) Overhead costs are 70% variable and the remaining 30% is depreciation of special equipment for Model XP5 that has no resale value. If Model XP5 is dropped from the product line, operating income will

A. Increase by $20,000. B. Increase by $60,000. C. Decrease by $20,000. D. Decrease by $40,000

why here the answer d

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Sameh Mahmoud Ismail
Accountant
Giza
Egypt
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= -600.000 (Sales) + 300.000 (materials) +120.000 (direct labor) + 70%*200.000 (just eliminate 70% variable cost)= -40.000
This is the amount will impact to PnL in case Model XP5 is dropped, 30% of overhead cost is depreciation, it is non-cash cost.

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DIEM LE NGUYEN THI
Other
Ho Chi Minh City
Viet Nam
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Hi

You have to identify which costs are relevant and which are not. Relevant will change among alternatives and not relevant will not.
Depreciation of the special equipment is a fixed expense and will remain regardless the product is dropped or not, hence not relevant.

If Model XP5 is dropped, the P&L of this product would be
Overhead (Depreciation)   200,000 * 30% = (60,000)
Operating Income                                      = (60,000)

vs

Operating Income = (20,000) 

Operating income decreased by 40,000


I hope that helps.

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Brian Ruskolekier
Controller
Buenos Aires
Argentina
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