LO 10.1Ella Maksimov is CEO of her own marketing firm. The firm recently moved from a strip mall in the suburbs to an office space in a downtown building, in order to make the firm’s employees more accessible to clients. Two new clients are interested in using Ella’s advertising services but both clients are in the same line of business, meaning that Ella’s company can represent only one of the clients. Pampered Pooches wants to hire Ella’s firm for a one-year contract for web, newspaper, radio, and direct mail advertising. Pampered will pay $126,000 for these services. Ella estimates the cost of the services requested by Pampered Pooches to be $83,000. Delightful Dogs is interested in hiring Ella to produce mass mailings and web ads. Delightful will pay Ella $94,000 for these services and Ella estimates the cost of these services to be $47,000. Identify any relevant costs, relevant revenues, sunk costs, and opportunity costs that Ella Graham has to consider in making the decision whether to represent Pampered Pooches or Delightful Dogs.
LO 10.1You are trying to decide whether to take a job after you graduate or go onto graduate school. Consider the following questions as you make your decision.
- Which of these costs, for the most part, would be relevant (R), and which would be irrelevant (IR)?
- Cost of your undergraduate education
- Salary with an undergraduate degree
- Salary with both an undergraduate degree and a graduate degree
- Rent
- Car Insurance
- Graduate school tuition and fees
- Food costs
- Moving expenses
- Which of these costs could have a differential amount that is relevant/irrelevant, depending upon the location and or policies of your new job?
LO 10.1You are working for a large firm that has asked you to attend a career fair at a university that is 185 miles from your office. You need to be there at 9:00 a.m. on a Monday morning. You can drive your personal car and be reimbursed $0.55 per mile, but you would need to leave home at 5:30 a.m. to get to the event and set up on time. Company policy allows you to spend the night if you must leave town before 6:00 a.m. The hotel across the street from campus charges $85 per night. Instead of driving, you could catch a 7:00 a.m. flight with a round-trip fare of $260. Flying would require you to rent a car for $29 per day, and you would have an airport parking fee of $20 for the day. The company pays a per diem of $40 for incidentals if you spend at least 6 hours out of town. (The per diem would be for one 24-hour period for either flying or driving.) As a manager, you are responsible for recruiting within a budget and want to determine which is more economical.
Use the information provided to answer these questions.
- What is the total amount of expenses you would include on your expense report if you drive?
- What is the total amount of expenses you would include on your expense report if you fly?
- What is the relevant cost of driving?
- What is the relevant cost of flying?
- What is the differential cost of flying over driving?
- What other factors should you consider in your decision between driving and flying?
LO 10.2Dimitri Designs has capacity to produce 30,000 desk chairs per year and is currently selling all 30,000 for $240 each. Country Enterprises has approached Dimitri to buy 800 chairs for $210 each. Dimitri’s normal variable cost is $165 per chair, including $50 per unit in direct labor per chair. Dimitri can produce the special order on an overtime shift, which means that direct labor would be paid overtime at 150% of the normal pay rate. The annual fixed costs will be unaffected by the special order and the contract will not disrupt any of Dimitri’s other operations. What will be the impact on profits of accepting the order?
LO 10.2Aspen Enterprises makes award pins for various events. Budget information regarding the current period is:
A fraternity with which Aspen has a long relationship approached Aspen with a special order for 6,000 pins at a price of $2.75 per pin. Variable costs will be the same as the current production, and the special order will not impact the rest of the company’s orders. However, Aspen is operating at capacity and will incur an additional $5,000 in fixed manufacturing overhead if the order is accepted. Based on this information, what is the differential income (loss) associated with accepting the special order?
LO 10.3Country Diner currently makes cookies for its boxed lunches. It uses 40,000 cookies annually in the production of the boxed lunches. The costs to make the cookies are:
A potential supplier has offered to sell Country Diner the cookies for $0.85 each. If the cookies are purchased, 10% of the fixed overhead could be avoided. If Jason accepts the offer, what will the effect on profit be?
LO 10.3Oat Treats manufactures various types of cereal bars featuring oats. Simmons Cereal Company has approached Oat Treats with a proposal to sell the company its top selling oat cereal bar at a price of $27,500 for 20,000 bars. The costs shown are associated with production of 20,000 oat bars currently.
The manufacturing overhead consists of $3,000 of variable costs with the balance being allocated to fixed costs. Should Oat Treats make or buy the oat bars?
LO 10.4The Party Zone is trying to decide whether or not to continue its costume segment. The information shown is available for Party Zone’s business segments. Assume that neither the Direct fixed costs nor the Allocated common fixed costs may be eliminated, but will be allocated to the two remaining segments.
If costumes are dropped, what change will occur to profit?
LO 10.5Beretti’s Food Mart has 6,000 pounds of raw pork nearing its expiration date. Each pound has a cost of $5.50. The pork could be sold “as is” for $2.50 per pound to the dog food processing plant, or it could be made into custom Italian sausage and sold in the meat department. The cost of the sausage making is $3.00 per pound and each pound could be sold for $7.50. What should be done with the pork and why?
LO 10.5Balcom Dairy gathered this data about the two products that it produces:
Which of the products should be processed further?
LO 10.6Power Corp. makes 2 products: blades for table saws and blades for handsaws. Each product passes through the sharpening machine area, which is the chief constraint during production. Handsaw blades take 15 minutes on the sharpening machine and have a contribution margin per blade of $15. Table saw blades take 20 minutes on the sharpening machine and have a contribution margin per blade of $35. If it is assumed that Power Corp. has 5,000 hours available on the sharpening machine to service a minimum demand for each product of 4,000 units, how much will profits increase if 200 more hours of machine time can be obtained?
LO 10.6Power Corp. makes 2 products: blades for table saws and blades for handsaws. Each product passes through the sharpening machine area, which is the chief constraint during production. Handsaw blades take 15 minutes on the sharpening machine and have a contribution margin per blade of $15. Table saw blades take 20 minutes on the sharpening machine and have a contribution margin per blade of $35. If it is assumed that Power Corp. has 5,000 hours available on the sharpening machine to service a minimum demand for each product of 4,000 units, how many of each product should be made?