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Econ528Spring2011Project-2Guidelines - University of...

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University of Louisiana at Lafayette Econ 528: Managerial Economics Spring 2011 Project-2 Due Date: April 26, 2011 1. Incremental Costs . Electron Control, Inc., sells voltage regulators to other manufacturers, who then customize and distribute the products to quality assurance labs for their sensitive test equipment. The yearly volume of output is 15,000 units. The selling price and cost per unit are shown below: Selling price $200 Costs: Direct material $35 Direct labor 50 Variable overhead 25 Variable selling expenses 25 Fixed selling expenses 15 150 Unit profit before tax $ 50 Management is evaluating the alternative of performing the necessary customizing to allow Electron Control to sell its output directly to Q/A labs for $275 per unit. Although no added investment is required in productive facilities, additional processing costs are estimated as: Direct labor $25 per unit Variable overhead $15 per unit Variable selling expenses $10 per unit Fixed selling expenses $100,000 per year A. Calculate the incremental profit Electron Control would earn by customizing its instruments and marketing directly to end users. 2. Breakeven Analysis . The Truck Stop is a repair facility specializing in the maintenance and repair of diesel engines just outside of Carlisle, Pennsylvania--one of the largest trucking hubs in the U.S. The business manager of the Truck Stop has been asked by the owners to prepare a financial analysis of the potential of a 24-hour repair operation. Opening such a center would require remodeling the facility and the hiring of some additional staff. Estimated first year expenses for the Truck Stop's diesel service center are: Support staff salary expense $ 15,000 Mechanic Salary expense 80,000 Supplies 4,000 Equipment 5,000 Remodeling 10,000 Electricity, heat, and taxes 8,000 Total expenses $122,000 Mechanic and staff salary expenses are estimated on an hourly basis, reflecting additional salary and overtime costs. Supplies and remodeling expenses are above and beyond those required for normal facility operations. Equipment costs represent a prorated share of the centers fixed equipment-leasing Page 1 of 7
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costs. Electricity costs of $2,000 reflect additional anticipated usage, whereas heat and taxes of $6,000 reflect an allocated share of fixed expenses. A. Calculate breakeven revenue for the Truck Stop's proposed 24-hour diesel service center. 3. Opportunity Costs . Three graduate business students are considering operating a tofu burger stand in the Dalles, Oregon, windsurfing resort area during their summer break. This is an alternative to summer employment with a local fruit cannery where they would earn $7,500 each over the three-month summer period. A fully equipped facility can be leased at a cost of $8,000 for the summer. Additional projected costs are $2,000 for insurance, and 25¢ per unit for materials and supplies. Their tofu burgers would be priced at $1.50 per unit.
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