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Unformatted text preview: CHAPTER 23 (FIN MAN); CHAPTER 8 (MAN) DIFFERENTIAL ANALYSIS AND PRODUCT PRICING CLASS DISCUSSION QUESTIONS 1. a. Differential revenue is the amount of in- crease or decrease in revenue expected from a particular course of action com- pared with an alternative. b. Differential cost is the amount of in- crease or decrease in cost expected from a particular course of action com- pared with an alternative. c. Differential income is the difference between differential revenue and differ- ential cost. 2. This decision is an example of a make vs. buy decision. Exabyte is focusing on its comparative advantages, which include mar- keting and distribution, while building part- nerships with others to actually manufacture key elements of the product. 3. In the long run, the normal selling price must be set high enough to cover all costs (both fixed and variable) and provide a reasonable amount for profit. 4. The differential income and costs of the lease option should be compared against selling the building. The differential revenue would be the lease revenue compared to the proceeds from sale. The differential ex- penses would be the costs associated with leasing the building, including maintenance, property tax, and insurance compared to the expense of selling, such as sales commis- sions. The opportunity cost of money should also be considered in the analysis. 5. Assuming there is demand for the premium grade product, this would assume the differ- ential price (premium less commodity) ex- ceeded the differential cost to process the product to premium grade. 6. A business should only accept business at a special price if the lower price will not con- taminate the regular pricing for other cus- tomers or induce other customers to buy at the special price. In addition, the business must be careful not to violate the Robinson- Patman Act, which prohibits uncompetitive price differences across different markets for the same product. Lastly, the company may only offer the special price once for an incre- mental order. Thus, the business must con- sider the longer-term ramifications of offer- ing discount business to a customer that may wish to order in the future. 7. It would be reasonable to purchase from the supplier if the fixed cost per unit was less than 40 cents. That is, if the fixed cost were less than 40 cents per unit, then the variable cost per unit would exceed the suppliers price, making the supplier price more at- tractive. 8. Some of the financial considerations include the profitability of the store, including all the revenues, variable and fixed costs associ- ated with the store, since they would all be differential to the decision. In addition, any costs of closing the store and preparing the store for disposal would need to be con- sidered (legal costs, demolition costs, em- ployee severance costs). Lastly, the oppor- tunity cost of the value of the equipment and land (either in cash or rental income) should be considered. For example, if the opportun-be considered....
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