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Creative Star Corporation produces three lines of desks from wood: Classic,Royal,and Standard.Cost and revenue data pertaining to each product are shown below:
Classic desks require five square yards of wood,Royal requires ten square yards,and Standard requires three square yards.High demand for each product line far exceeds the company's production capacity.
-If Creative Star Corporation has only 250,000 square yards of wood available,what is the highest total amount of fixed cost the company can incur and still break-even?
A)$2,500,000
B)$4,000,000
C)$5,000,000
D)$6,000,000

Question

[The following information applies to the questions displayed below.]
Creative Star Corporation produces three lines of desks from wood: Classic,Royal,and Standard.Cost and revenue data pertaining to each product are shown below:
  Classic desks require five square yards of wood,Royal requires ten square yards,and Standard requires three square yards.High demand for each product line far exceeds the company's production capacity.
-If Creative Star Corporation has only 250,000 square yards of wood available,what is the highest total amount of fixed cost the company can incur and still break-even?
A)$2,500,000 
B)$4,000,000 
C)$5,000,000 
D)$6,000,000

Quizplus · Accepted Answer

To determine the highest fixed cost the company can incur and still break-even, we need to find the maximum revenue that can be generated with a wood limit of 250,000 square yards. We can find this by calculating how many desks of each type can be made with the available wood and multiplying that by the revenue generated per desk.

Using the wood requirements given, we can calculate the maximum number of each type of desk that can be produced with 250,000 square yards of wood:

Classic desks: 250,000 / 5 = 50,000 desks
Royal desks: 250,000 / 10 = 25,000 desks
Standard desks: 250,000 / 3 = 83,333 desks (rounded down)

Next, we need to calculate the revenue generated per desk. The cost and revenue data is not given for each desk, but we can assume that the profit margin is the same for each desk and use the wood requirements to determine a "cost" per desk. For example, if the cost per square yard of wood is $10, then the "cost" of wood for each desk would be:

Classic desks: 5 * $10 = $50
Royal desks: 10 * $10 = $100
Standard desks: 3 * $10 = $30

Assuming all other costs are the same, we can assume that the profit margin is revenue minus this "cost" per desk. If the revenue per desk is greater than this "cost," then the company is making a profit. Therefore, we need to find the revenue per desk that is greater than or equal to the cost per desk.

Let x be the revenue per desk. Then we have:
x - $50 ≥ 0 (for Classic desks)
x - $100 ≥ 0 (for Royal desks)
x - $30 ≥ 0 (for Standard desks)

Solving for x in each inequality, we get:
x ≥ $50 (for Classic desks)
x ≥ $100 (for Royal desks)
x ≥ $30 (for Standard desks)

The revenue generated per desk must satisfy all three inequalities, so the minimum revenue per desk is the highest of the three amounts, which is $100 for Royal desks. Therefore, the maximum revenue that can be generated with 250,000 square yards of wood is:

50,000 Classic desks * $100 = $5,000,000
25,000 Royal desks * $100 = $2,500,000
83,333 Standard desks * $30 = $2,500,000 (rounded down)

Total revenue = $10,000,000

To break even, the company's total cost must equal its total revenue. We can use the following formula to calculate the total cost:

Total cost = (variable cost per unit * total units) + fixed cost

We don't know the variable cost per unit, but we do know that each desk requires a certain amount of wood and that the company has only 250,000 square yards of wood available. We can assume that the cost per square yard of wood is the variable cost per unit. If the company can make 50,000 Classic desks, 25,000 Royal desks, and 83,333 Standard desks, then the total variable cost is:

50,000 Classic desks * 5 square yards * $10 = $2,500,000
25,000 Royal desks * 10 square yards * $10 = $2,500,000
83,333 Standard desks * 3 square yards * $10 = $2,500,000 (rounded down)

Total variable cost = $7,500,000

To break even, the total cost must equal the total revenue:

Total cost = Total revenue
(variable cost per unit * total units) + fixed cost = $10,000,000
$7,500,000 + fixed cost = $10,000,000
fixed cost = $2,500,000

Therefore, the highest total amount of fixed cost the company can incur and still break-even is $2,500,000. Choice C is the correct answer.

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