Question

Bonita Industries produces three versions of baseball bats: wood, aluminum, and hard rubber. A condensed segmented income statement for a recent period follows:

	Wood		Aluminum		Hard Rubber		Total
Sales	$590000		$280000		$65000		$935000
Variable expenses	365000		220000		58000		643000
Contribution margin	225000		60000		7000		292000
Fixed expenses	75000		35000		22000		132000
Net income (loss)	$150000		$ 25000		$(15000)		$160000

Assume none of the fixed expenses for the hard rubber line are avoidable. What will be total net income if the line is dropped?

$153000

$220000

$175000

$65000

Companies that sell products whose prices are set by market forces are called

price setters.

price givers.

price leaders.

price takers.

Answer 1

1.

Bonita Industries produces three versions of baseball bats: wood, aluminum, and hard rubber. A condensed segmented income statement for a recent period is given :

Bonita industries is considering dropping the hard rubber line, now in case a line or division is dropped the contribution margin lost becomes the relevant cost for decision making and any fixed cost savings also become relevant items based on this dropping or keeping of a loss making line is made.

Here if the hard rubber line is dropped fixed cost still be incurred, so it becomes a sunk cost not useful for decision but the contribution margin lost due to dropping it will become the relevant cost, i.e a cost of $ 7000 is involved if hard rubber line is dropped.

Thus profit if the hard rubber line is dropped = Contribution margin of existing lines - total fixed cost.

Profit if hard rubber line dropped = $ 225000 + 60000 - $ 132000.

Profit if hard rubber line dropped = ,$ 153,000.

Thus the correct Option is --------- A i.e $ 153,000.

Just for understanding: it is not advisable to drop the hard rubber as the contribution of $ 7000 was covering some part of fixed cost thus reducing the loss, dropping it will increase the loss and reduce the profit.

2.

There is a concept in perfect competition market that the seller's se this market are price takers and in monopoly market the seller's are price makers.

In competitive market the seller's are the price takers which means they did not decide the price of products but it is decided by the demand and supply forces in the maket.

The option price setters , price givers and price leaders are invalid as this prices are manipulated by the seller in some or other way.

Thus Companies that sell products whose prices are set by market forces are called price takers

Thus the correct Option is _---------------D i.e Price takers.