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?