bambersm_ch08

bambersm_ch08 - Chapter 8 Short-Term Business Decisions...

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Chapter 8 Short-Term Business Decisions Quick Check Answers: 1. b 3. d 5. b 7. d 9. c 2. c 4. a 6. b 8. a 10. d Short Exercises (5 min.) S 8-1 a. The price of the new printer is relevant . b. The price you paid for the old printer is irrelevant because it is a past (sunk) cost that cannot be changed, regardless of your decision. c. The trade-in value of the old printer is relevant . d. Paper costs are irrelevant because these costs will be the same with either the old printer or the new printer. e. The difference between the ink cartridges’ cost for the old printer and ink cartridges’ cost for the new printer is relevant . Chapter 8 Short-Term Business Decisions 1
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(5 min.) S 8-2 ACDelco Incremental Analysis of Special Sales Order Expected increase in revenues (20,000 filters × $1.75) $ 35,000 Expected increase in expenses: Variable manufacturing costs (20,000 filters × $1.35) $27,000 Fixed manufacturing cost (special equipment) 9,000 Total expected increase in expenses (36,000 ) Expected decrease in operating income $ (1,000 ) ACDelco should not accept the special sales order because it will reduce operating income. Managerial Accounting Class-Test Edition 2
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(10 min.) S 8-3 Req. 1 SnowDreams should emphasize a cost-plus approach to pricing because it has been able to differentiate its ski resort from others in the area. Because of its favorable reputation, managers will have some control over pricing. Of course, they still need to consider whether the cost-plus price is within the range customers are willing to pay. Req. 2 Using a cost-plus pricing approach, the cost-plus price would be calculated as follows: Fixed costs $33,750,000 Plus: total variable costs (750,000 × $10 per person) 7,500,000 Total Costs $41,250,000 Plus: Desired profit ($100 million × 15%) 15,000,000 Target revenue $56,250,000 Divided by number of skiers / snowboarders ÷ 750,000 Cost-plus price per lift ticket $ 75 The cost-plus price is only $5 above competing ski resorts in the area. Given SnowDreams favorable reputation, they should be able to charge $75 a day without affecting their volume. Chapter 8 Short-Term Business Decisions 3
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(10 min.) S 8-4 Req. 1 If SnowDreams is a price-taker, projected income is as follows: Revenue at market price (750,000 × $65)………………. . $48,750,000 Total costs (from S 8-3)……………………………………. (41,250,000 ) Operating income…………………………………………… $ 7,500,000 vs. Desired operating income ($100 million × 15%)…. . $15,000000 Profit expectation shortfall………………………………. .. $ 7,500,000 If SnowDreams has to settle for the market price of $65 per lift ticket, its operating income will be $7,500,000—which is less than investors hope for. The company’s profits, as a percentage of assets, will only be 7.5% ($7.5 million ÷ $100 million) rather than the desired 15%. Stock prices may decline as a result. Req. 2
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This note was uploaded on 04/08/2008 for the course ACCT 1302 taught by Professor Venkateswar during the Spring '08 term at Trinity U.

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bambersm_ch08 - Chapter 8 Short-Term Business Decisions...

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