(continued) 15-14
15-27 (1) (continued) Note to Instructor: Most students will avoid setting up the cost equations by observing that only $3,000 more of fixed overhead is incurred by making the sets of hands than by not making them and that $10 ($24 purchase price - $14 variable cost) is saved for each set of hands made. Thus it will take only 300 sets of hands ($3,000 $10 per set of hands) before the savings equals the extra costs. They will then reason that it will be cheaper to buy for less than 300 sets of hands and cheaper to make for more than 300 sets of hands. Of course this reasoning is precisely that shown by comparing the cost equations. (2) None of the fixed overhead costs listed seems to have much potential for being avoidable. This is often the case with fixed costs which are incurred to provide the capacity for a company to engage in a particular activity. However, in actual decision situations, costs such as these sometimes are at least partially avoidable depending upon the extent of the reduction in activity and other specific circumstances. For example, depreciation equipment on may be partially avoidable by canceling decisions to replace equipment due for replacement. Also, property taxes may be partially avoided if decreases in activity allow equipment to be discarded and inventories on hand to be reduced (both being considered in the property tax assessment). Finally, routine maintenance costs on any equipment which is discarded might be avoidable. 15-28 (1) If the company spends $4,000 on advertising sheet music alone, the increase in the company's profit will be: Increase in contribution margin (1,200 units @ $7) $8,400 Increase in advertising cost (4,000) Increase in profit $4,400 (2) If the company spends $4,000 on advertising compact disks alone, the increase in the company's profit will be: Increase in contribution margin (1,600 units @ $6) $9,600 Increase in advertising cost (4,000) Increase in profit $5,600 (3) If only $3,000 is spent on advertising sheet music alone, the increase
in the company's profit will be: Increase in contribution margin (1,100 units @ $7) $7,700 Increase in advertising cost (3,000) Increase in profit $4,700