# Profit effect of dropping solenoid testers also can

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profit effect of dropping solenoid testers also can be verified by constructing an income statement with battery testers. Such an income statement is presented below: Battery Testers Revenue \$700,000 Variable costs* (280,000) Contribution margin \$420,000 Fixed costs (420,000) Profit \$0 * = \$240,000 + \$40,000 Again, we see that Neutron’s overall profit is expected to decrease by \$120,000 to \$0 . d. We see that unitizing fixed costs (expressing them on a per-unit basis) can allow us to quickly calculate overall profitability or the reported profitability of any particular product. That is, we can simply take the price per unit less Balakrishnan, Sivaramakrishnan, & Sprinkle – 2e FOR INSTRUCTOR USE ONLY 6-32
the cost per unit multiplied by the number of units sold. Unfortunately, unitizing fixed costs could lead to disastrous effects in terms of decision- making. This outcome occurs because decision makers can be tempted to multiply the unitized fixed cost by some new level of volume to arrive at total fixed costs. Over many ranges of activity, however, fixed costs in total will not change – thus, it is important to remember that total fixed costs equal the fixed cost per unit multiplied by the level of volume used to arrive at the fixed cost per unit. By using one volume to calculate the fixed cost per unit and multiplying it by another volume, the decision maker is treating the fixed cost as if it were variable, which it is not. This feature [again] underscores that fixed costs often are not relevant to short-term decisions. 6.57 a. The incremental cost associated with the show appears to be \$250, or the variable cost of running the show. The [allocated] fixed cost per show is not relevant because the total amount of fixed costs for the year will not change as a result of the special screening. Further, the stated ticket prices are not relevant because the show will take place in the mid-morning hours when the IMAX is not traditionally open – thus, the students will not be displacing any regular customers. Based on the financial data provided, the minimum price quote appears to be \$250 . b. At a minimum, Randy should consider the following: Does the Science Station have a gift shop and/or cafeteria? If so, many students are likely to buy food and/or gift items, thereby increasing the Science Station’s contribution margin. In turn, this would reduce the minimum price quote in part [a]. What is the impact on future revenue? What proportion of the students and teachers would have seen the show at the regular price? (That is, what is the opportunity cost in the form of lost revenue?). Alternatively, after seeing the show, many students may return with their parents, thereby increasing future revenue. Are there costs associated with the special showing that are not captured by the \$250 variable cost number? For example, will the Science Station have to pay an overtime premium for a projectionist and/or usher?