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