Question 1. Baker Company manufactures and sells 20,000 units of product X per month. Each unit of product X sells for $15 and has a
contribution margin of $4. If product X is discontinued, $56,000 in fixed monthly overhead costs would be eliminated and there would be no effect on the sales volume of Baker Company's other products.
If product X is discontinued, Baker Company's monthly income before taxes should:
a. Increase by $80,000.
b. Increase by $24,000.
c. Decrease by $80,000.
d. Decrease by $24,000.
Use the following to answer questions 2-3:
Question 2: Boggs Corporation produces three lines of desks from wood: classic, royal, and standard. Cost and revenue data pertaining to each product are shown below:
classic royal standard
selling price $130 $200 $50
total variable 30 120 20
Classic desks require five square yards of wood, royal require ten square yards, and standard require three square yards. High demand for each product line far exceeds the company's production capacity.
Question 3. Refer to the information above. If Boggs Corporation has a limited supply of wood available, which products should it produce:
a. Royal only.
b. Classic and Royal.
c. Royal and standard.
d. Classic only.
Question 4. Refer to the information above. If Boggs Corporation has only 500,000 square yards of wood available, what is the highest total amount of fixed cost the company can incur and still break even?
a. $5,000,000.
b. $8,000,000.
c. $10,000,000.
d. $12,000,000.
Use the following to answer questions 5-6:
Stellar Corporation manufactures telephones. Recently, the company produced a batch of 500 defective telephones at a cost of $6,000. Stellar can sell these telephones as scrap for $5 each. It can also rework the entire batch at a cost of $4,000, after which the telephones could be sold for $16 per unit.
Question 5. Refer to the information above. Which of the following statements is false regarding the defective units?
a. Stellar will not recover its costs if it sells the defective units as scrap.
b. Stellar will recover its costs if it reworks the defective units.
c. Stellar will not recover its costs if it reworks the defective units.
d. Stellar will recover more of its costs if it decides to rework the defective units.
Question 6. Refer to the information above. If Stellar reworks the defective telephones, by how much will its operating income change?
a. Increase by $1,500.
b. Decrease by $2,000.
c. Increase by $4,000.
d. Decrease by $4,500.