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Solutions -- Week 14

# Solutions -- Week 14 - WEEK CLS DATES[M-W 14 DATES[T-Th GNB...

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GNB Problem Solutions – Week-by-Week page 1 of 8 WEEK 14 GNB ASSIGNED PROBLEM SOLUTIONS BUAD 250B – FALL 2009 CLS DATES [M-W] DATES [T-Th] TOPICS READINGS ASSIGNMENTS [TO BE COMPLETED BY DATE ASSIGNED] 26 Nov 23 Nov 24 Relevant Costs for Decision Making Ch. 13 BE: 13-2, 3, 4, 5, 6 PR: 13-8, 10 In-class: 13-9, 12 OUT: Final Exam Review Materials Nov 25 Nov 26 [ No WED or THUR Class ] THANKSGIVING DAY – University Holiday Exercise 13-2 1. No, production and sale of the racing bikes should not be discontinued. If the racing bikes were discontinued, then the net operating income for the company as a whole would decrease by \$11,000 each quarter: Lost contribution margin ................................................................. \$(27,000) Fixed costs that can be avoided: Advertising, traceable ................................................................ \$ 6,000 Salary of the product line manager ............................................ 10,000 16,000 Decrease in net operating income for the company as a whole .... \$(11,000 ) The depreciation of the special equipment is a sunk cost and is not relevant to the decision. The common costs are allocated and will continue regardless of whether or not the racing bikes are discontinued; thus, they are not relevant to the decision. Alternative Solution: Current Total Total If Racing Bikes Are Dropped Difference: Net Operating Income Increase or (Decrease) Sales .................................................................... \$300,000 \$240,000 \$(60,000) Variable expenses ............................................... 120,000 87,000 33,000 Contribution margin ............................................. 180,000 153,000 (27,000 ) Fixed expenses: Advertising, traceable ...................................... 30,000 24,000 6,000 Depreciation on special equipment* ................................................... 23,000 23,000 0 Salaries of product managers .......................... 35,000 25,000 10,000 Common allocated costs ................................. 60,000 60,000 0 Total fixed expenses ............................................ 148,000 132,000 16,000 Net operating income .......................................... \$ 32,000 \$ 21,000 \$(11,000 ) *Includes pro-rated loss on the special equipment if it is disposed of.

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