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Chapter 9[1] - Managerial Economics 6005 Professor Juliet...

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Managerial Economics 6005 Professor Juliet Elu Chapter 9 Assignment Spring 2008 Group’s Members: Mohammad Aladalh Joel Njenga Verda Weekes EL Drame
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Chapter 9 Problems: MGNT 6008, Prof. J. Elu, spring 2008. Group Members: Mohammed Aladalh, El Drame, Verda Weeks & Joel Njenga Q9.1 The relevant cost for most managerial decisions is the current cost of an input. The relevant cost for computing income for taxes and stockholder reporting is the historical cost. What advantages or disadvantages do you see in using costs for tax and stockholder reporting purposes? Theoretically, it would be preferable to use current costs for income tax calculations and for stockholder reporting. On a practical level, however, this would be nearly impossible. Estimation of current cost, based upon current market values, would be a difficult task with a great deal of room for subjectivity. This could result in many arbitrary cost designations, and the "policing" of tax returns would become a much more formidable task. On a practical basis, the use of historical costs for tax and stockholder reporting purposes has obvious advantages over the theoretically superior current costs. P9.3 Southwest Airlines offers four flights per weekday from Cleveland, Ohio, to Tucson, Arizona. Adding a fifth flight per weekday would cost $15,000 per flight, or $110 per available seat. Calculate the incremental costs borne by Southwest following a decision to go ahead with a fifth flight per day for a minimal 60-flight trial period. What is the marginal cost? N this case, is incremental cost or marginal cost relevant for decision-making purposes?
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