comm 354 sample midterm solution

# If costs changed because of inflation then we have a

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Unformatted text preview: on adjustment , estimate the fixed cost for year 11 1,885,989 - #9,979 (\$208) = &lt; \$189,815 &gt; c) If inflation is real and is embedded in all of the firm’s financial numbers then why should it be removed? Distorts model over/under estimates cost patterns Managers are seeking information about costs so that they can base their decisions on good cost models. Inflation will distort the high low calculation. The formula for a line (slope) is seeking to link the change in costs with the change in units. If costs changed because of inflation then we have a faulty model which will lead to poor decisions… d) Calculate the expected profit for year 11. Need to bring year 8 to year 3, remove 5 years of 5% inflation 1,885,989/ (1.05)5 = 1,477,722 Then do high low 1,477,722 – 764,360 = \$713,361/ #5,392 = \$132.30 (year 3 \$\$) Bring forward 8 years from year 3 to year 11 = (132.30) (1.05)8 \$ 195.47 After adjusting for inflation estimate the fixed costs for year 11 Fixed costs Use either point: \$1,477,772 – 132.30(9,979) = \$157,500 Move forward 8 years of inflation \$157,500 (132.30) (1.05)8 = \$232,700 #8,900 (\$240 - \$195.47) - \$232,700 = \$163,617 (roughly) Prepared by J. Kroeker, 2011 © Sauder School of Business, UBC Page 3 e) A special order has been received from Corte Ltd. for #2,000 crates in year 11 at a price of \$220 per crate from a large corporation that ships lawn furniture during the months of April, May , June and July. What is the financial impact of accepting this special order? Opportunity costs: Ca...
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## This note was uploaded on 01/14/2014 for the course COMM 354 taught by Professor All during the Winter '08 term at The University of British Columbia.

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