Chapter 6 Solutions - CHAPTER 6 Decision Making in the...

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C HAPTER 6 Decision Making in the Short Term Solutions 29,37,43,52,53,56 6.29 a. Anja’s decision deals with excess demand. Due to the holidays, Anja expects a surge in gift-wrapping needs. To handle this surge, Anja is considering hiring a helper. This is akin to a manufacturing firm outsourcing some production in periods of high demand. b. We can approach this problem in two ways. One way is to calculate profit = revenues – variable costs – fixed costs. We can construct the entire CVP model for Anja. We then compare the profit under each option, selecting the option with the higher profit. With the information provided, we have: Without Helper With Helper 60 packages Per day 110 packages per day Daily revenue ($3 60; $3 110) $180.00 $330.00 Daily variable costs ($1 60; $1 110) 60.00 110.00 Daily pay for help (0; $8.50 10) 0.00 85.00 Daily contribution Row 1– rows 2 & 3 $120.00 $135.00 Total contribution Row 4 30 $3,600.00 $4,050.00 Total fixed costs Given 600.00 600.00 Profit $3,000.00 $3,450.00 Comparing the total profit, we find that Anja’s profit increases by $450 ($3,450 – $3,000) for the season, if she hires the helper. Accordingly, if she wishes to maximize profit then Anja should hire the helper . In constructing the income statement for each option, we could leave out the non- controllable fixed costs of $600. While the absolute profit numbers would change, the difference in profit would be preserved. Thus, the gross approach provides decision makers some flexibility in terms of what is included and excluded from the income statement. We also could compute only the incremental revenues and costs associated with a particular decision option relative to the status quo. Since operating without the helper is the status quo, we have: Incremental revenue 50 packages per day $3 $150 Incremental variable cost (packages) 50 packages per day $1 50 Incremental cost (helper) $8.50 10 hours 85
Incremental profit per day $15 Value of hiring helper $15 30days $450 Again, we see that Anja increases monthly profit by $450 if she hires a helper. The difference in profit derived with controllable cost analysis exactly equals the difference in profit under the gross approach. This underscores the equivalence of the two approaches. 6.37 c. Tom and Lynda’s decision turns on alternate uses for the space, or its opportunity cost. The problem indicates the room is unused during this time. There is minimal disruption of operations. Increases to direct costs, if any, are small. Thus, the $600 offered by Marjorie would flow directly to profit. Overall, Tom and Lynda should accept the offer . d. The change in class timings changes the problem from one of excess supply to one of excess demand. During the peak evening hours, there is considerable demand for the room (which is why scheduling Marjorie’s class will displace existing classes). Tom and Lynda therefore need to consider the best use of the space during the evening hours. Using it for regular classes benefits the membership, and prevents a loss of members. Using it for Marjorie’s classes generates additional revenue. But, the opportunity cost is the loss of members, valued at 8 × ($100 - $35) = $520 per month. The net gain from accepting

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