Question

BT&T Corporation manufactures telephones. Recently, the company produced a batch of 600 defective telephones at a cost of $9,000. BT&T can sell these telephones as scrap for $9 each. It can also rework the entire batch at a cost of $6,500, after which the telephones could be sold for $20 per unit. If BT&T reworks the defective telephones, by how much will its operating income change? Increase by $500. Decrease by $1,600. Increase by $5,500. Decrease by $6,500.

Answer 1

Answer:

Increase by $5,500.

Explanation:

The computation of the change in the operating income is shown below:

Data given in the question

Number of defective telephones = 600

Cost = $9,000

Scrap for each = $9

Entire batch cost = $6,500

Sale value per unit = $20

Now in the case of defective telephones, the change in operating income is

= 600 units × $20 - $6,500

= $12,000 - $6,500

= $5,500