Warren SMChap24(09)

Warren SMChap24(09) - CHAPTER 24(FIN MAN CHAPTER 9(MAN...

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CHAPTER 24 (FIN MAN); CHAPTER 9 (MAN) DIFFERENTIAL ANALYSIS AND PRODUCT PRICING EYE OPENERS 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 marketing and distribution, while building partnerships with others to actually manu- facture key elements of the product. 3. 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. 4. 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. 5. 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 incremental order. Thus, the business must consider the longer-term ramifications of of- fering discount business to a customer that may wish to order in the future. 6. It would be reasonable to purchase from the supplier if the fixed cost per unit was less than 50 cents. That is, if the fixed cost were less than 50 cents per unit, then the variable cost per unit would exceed the supplier’s price, making the supplier price more at- tractive. 7. 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 consid- ered (legal costs, demolition costs, employ- ee severance costs). Lastly, the opportunity cost of the value of the equipment and land (either in cash or rental income) should be considered. For example, if the opportunity value of the assets were $500 per month, then the store would need to have a profit- ability exceeding this amount to remain an attractive alternative. 8.
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This note was uploaded on 10/12/2010 for the course ACCT 116B taught by Professor Rivers during the Spring '09 term at City.

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Warren SMChap24(09) - CHAPTER 24(FIN MAN CHAPTER 9(MAN...

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