Decision Whether to Add or Drop: Carson Corporation.
a. The regional market should not be dropped as this market not only covers all
the variable costs and separable fixed costs but also gives net market
contribution of $780,000 toward the common fix
Solutions to Integrative Cases
(30 min.)The Effect of Cost Structure on Predatory Pricing:
a The relation between variable cost and price is important in a predatory
pricing case because there is no rational economic reason for set
Fundamentals of Cost Analysis for Decision
Solutions to Review Questions
Costs that are fixed in the short run are usually not fixed in the long run. In fact
few, if any, costs are fixed over a very long time horizon.
A sunk cos
b. The additional revenue from the racing bicycles is greater than the additional
costs from using the supplier and assembling the racing bicycles. Therefore
the suppliers offer should be accepted.
Contract 2,000 Regular Stoves;
Produce 1,600 Modified Stoves and 4,000 Regular Stoves
In- Regula Regula Modifie
house r (In) r (Out)
e. No, the $215 proposed purchase price is not acceptable.
2,000 Units Contracted
Total variable manufacturing costs
Total variable marketing costs
A shorter approach to Requirement b (but more difficult for some students to
understand) is this:
Forgone contribution (equals forgone income)
on regular sales if government contract is
1,000 x $195 = $(195,000) lost
Profit from gove
b. Recommendation: Dont accept contract.
Variable manufacturing costs.
d. The lowest price on the schools songs that M. Anthony can accept without
reducing profit is $35,000 per song.
To produce the schools songs, M. Anthony has to forgo the contribution
margin on 10 songs, which is equal to $600,000 (= $60,00
(30 min.)Decision Whether to Close a Store: Power Music.
We recommend that Power Music close the store. The cost savings are
greater than the lost margin on the sales. The difference, however, is not
large and if there are other considerations, they
(45 min.)Closing a Plant: Ironwood Corporation.
Computation of Estimated Profit from Operations
after Expansion of Minnesota Factory
Sales ($280,000 x 150%).
Factory ($56,000 x 120%).
Computation of Estimated Profit from Operations
after Shutdown of North Dakota Factory
Estimated operating profit:
Less home office costs previously allocat
e. At an increase in the cost of labor from $16 to $19, the contribution margins
per constrained resource of labor (10,000 additional hours) would be as
Contribution margins before labor cost increase:
Basic $3.00 = $60,000 20,000 uni
(20 min.) Optimum Product Mix: Bubble Company.
Bubble should produce only 1/2-litre bottles.
Although the capacity of the machine is missing, it is not necessary to answer
the question. Because the demand for both products is essentially unlimited,
(20 min.) Optimum Product Mix Excel Solver: Slavin Corporation.
a. Slavin should produce 150 units of Alpha and 80 units of Delta. The next
two pages show the setup using Excel Solver and the solution. The
problem can be solved without Excel as follo
(20 min.) Optimum Product Mix Excel Solver: Layton Machining
Layton should produce 100,000 Standard units 50,000 Custom units.
The next two pages show the setup using Excel Solver and the solution.
The problem can be solved without Excel
(30 min.) Special Orders: Sherene Nili
a. Based on profit, Ms. Nili should accept the special order. Accepting the
special order means Ms. Nili will only be able to produce 10 standard
dresses. Each standard dress requires 15 (= 300 hours 20 dresses)
(25 min.)Special Orders: Carlsbad Enterprises.
Carlsbad should accept the offer; profit is higher by $160,000.
The differential costs include:
Cost of the car
Forgone interest income on funds paid for the car
Interest on debt on the car
Maintenance that is time-related
License and taxes
These costs are different than the costs in 4-26. The costs in
he fixed costs of the equipment would approximately double.
In the short run, sales revenues need only cover the differential costs of
production and sale. So, from a short-run perspective, so long as the sale does
not affect other output prices or n
Solutions to Critical Analysis and Discussion Questions
The main differential costs are the rent and the additional commission. Staff
salaries and the other costs of providing mortgages would not be differential.
The remaining lease costs are su
Unit gross margins are typically computed with an allocation of fixed costs. Total
fixed costs generally will not change with a change in volume within the relevant
range. Unitizing the fixed costs results in treating them as though they are
e products life cycle to make pricing decisions. Life-cycle costs include not only
the costs of development and production, but also the costs of maintenance and
Cost-plus pricing is most likely to be used for unique products where no marke