D"#isi$ Maki! i &h" Sh$r& T"r*
(. Germitage "arms produces two products, P and Q, in a +oint process. he products may each be sold at the split$o2 point or processed further. he selling price I1.16 for P and I6.06 for Q if the products are sold without further processing. *ata for the two products, if processed further, is presented belowC (((. ((. 0 Pr . Pr$ 3 T $%#& 9 %#& : $&al (6. -ales volume (1. !0, (!. 1,6 (#. 666 units 66 units (%. evenues ((. I% (. I10, (. I !,666 %66 6,%66 (0. raceable (3. 1!, (6. (,66 (1. 1 processing cost 666 6 ,666 (!. -egment (#. I# (%. I1#, ((. I >argin 6,666 %66 %#,%66 (. oint costs (. (0. (3. I #(,666 (06. 8rot before (01. (0!. (0#. I axes ,666 (0%. (0(. e=uiredC )hat is the monetary advantage 4disadvantage5 of further processing the productsF -how calculations. (0. (0. (00. . Breative Lawn Ornaments sells three categories of lawn structuresC "ountains, ;ird and ;utter'y Gouses, and Obelis/s. "or the current year, Breative reported the following resultsC (03. (36. 31 F$ 3( H$% 3+ O) 3, T$& %&ais s"s "lisks al (3(. evenue (3. I1 (3. I1% (30. I3 (33. I% (,666 (,666 (,666 1(,666 66. Jariable 61. 6!. % 6#. % 6%. 1 costs 0(,666 #,666 (,666 #,666 6(. Bontribution 6. I 6. I16 60. I( 63. I! margin 36,666 !,666 6,666 %!,666 16. raceable 11. #6 1!. ##,6 1#. #6, 1%. 3#, xed costs ,666 66 666 666 1(. Bommon 1. 1. # 10. # 13. 1 xed costs #(,666 (,666 (,666 6(,666 6(4 Pr$=& 6(1 < 6(( < 6(+ ><1 6(, < ('444 +,'444 '444? ,,'444
6-(
Balakrisha/Maa!"rial A##$%&i!' ("
!(. !. Breatives owner is pleased with the overall prot, but is concerned about the loss on the Obelis/s line and is considering eliminating it. he owner believes that if the Obelis/ sales are discontinued he will be able to display more "ountains and increase the revenues by (H without increasing any xed costs. &f the Obelis/ line is discontinued, all of its traceable xed costs will be avoided, but its common xed costs will be allocated to the "ountains. !. 628. Required: !3. Dvaluate whether Breative Lawn Ornaments should discontinue its line of Obelis/ structures. -how all calculations. #6. #1. #!. ##. #%.
6-(6
D"#isi$ Maki! i &h" Sh$r& T"r* 6+
S$l%&i$s &$ Pr$)l"*s
1. -hort$term decision 4LO15 a. obins decision deals with excess demand. #. b. Answers may vary. -ome alternative courses of action includeC &nstead of hiring a helper, wor/ longer hours. • &nstead of hiring a helper, extend business from six days to seven days • per wee/. • &ncrease the price per tree, and thereby, reduce the number of clients. Limit the si:e of tree, thereby being able to complete more trees in the • same amount of time. • &nstead of hiring a helper paid per h our, outsource some wor/ for a xed fee per tree. ;egin decorating a few days earlier in Eovember. • #. c. Answers may vary. -ome long$term e2ects includeC • &f obin increases the price per tree, in the long$run sh e may lose clients. • ;y hiring a helper and accepting additional clients, in the long run obin may have to consider hiring additional employees. • &f obin increases business and hires helpers, in the long$run she may wish to o2er additional services such as decorating mantels, doorways, dining rooms, etc. )ith increased business, obin should consider the long$term e2ect on • her health. • )ith increased business, obin should consider the long$term e2ect on her personal and family obligations. #0. #3. !. -pecial Order 4LO!5 a. &ncremental cost associated with accepting the orderC %6. 6,1 A##" 6,( R"@ & Or"r "#& Or"r %#. evenue %%. I1(6 %(. I6 %. *rin/ mix and %. I 6 %0. I6 ice %3. Labor 4I0 per hr (6. I 1 (1. I6 x ! hrs5 (!. ransportation (#. I 1( (%. I6 ((. (. (.
6-(0
Balakrisha/Maa!"rial A##$%&i!' ("
(0. T$&al I#r"*"&al #$s&s I6 X I1 X I1( Y <31 (3. b. Eon$relevant costsC 6. "ixed overhead I6.%6 per drin/ 1. Jariable overhead I6.#( per drin/ !. c. risha should accept the orderC #. &ncremental %. evenue I1( 6 (. &ncremental . Bosts I 31 660 I#r"*"&al 66. r$=& < 3 3. 6. 1. ;ecause rishas incremental revenue exceeds her incremental costs and she has the capacity to accept the order 4it does not interfere with regular business5, it would be protable to accept the special order. !. #. #. >a/e or buy decision 4LO!, LO#, LO(55 %. a. elevant unit product costC (. I1! X I( X I! X I Y <( . b. Eet total dollar advantage 4disadvantage5 of purchasingC . 0. elevant cost 3. I1 !(,666 06. Additional contribution 01. %! margin ,666 0!. Bost of purchasing 0#. 41 (6,6665 0%. Eet advantage 6. < 10'444 0. c.
D"#isi$ Maki! i &h" Sh$r& T"r*
%. ;est use of resources in short supply4 LO%5 36. a. otal minutes re=uired to meet demandC 31. 4!,!66 units x ( minutes5 X 41,666 x % minutes5 X 4066 x minutes5 Y 1,66 minutes 3!. b. 8roduction to maximi:e protC 3#. 63, Pr$%#&s 3(. 636 630 63. 9 : ; 33. -elling price per unit 61. 6!. 6#. 66. I6 I( I06 6%. *irect material 6(. 6. 6. I1 I16 I1% 60. *irect labor 4all 63. 16. 11. variable5 1( 1% 1( 1!. Jariable overhead 1#. 1%. 1(. ! # % 1. Jariable selling 1. 10. 13. expense per unit ( % ! !6. otal variable cost !1. !!. !#. I#0 I#1 I#( !%. 0( C$&ri)%&i$ 0(6 0(0 0(. *ar!i "r %i& <+( <+, <, !3. >inutes re=uired per #6. #1. #!. unit ( % ##. Bontribution margin #%. #(. #. per minute I16 I1# I!6 #. #0. #3. %6. %1. Rant should produce the following units to maximi:e protC 0,( O&i*al Ui&s 0,+ Mi 0,, Aaila) %&"s Us" l" Mi%&"s %(. %. %. 3,66 %0. 8roduct U 066 units %3. %,06 (6. %,066 Z minutes 6 (1. 8roduct P 1,666 (!. %,66 (#. 066 units Z% minutes 6 (%. 8roduct Q 16units ((. 06 (. $6$ Z ( minutes 6 (. (0.
6-(3
Balakrisha/Maa!"rial A##$%&i!' ("
(. oint costs 4Appendix A5 (3. 6. %. 0.
8rocess "urtherC -ales volume
!.
evenues
. raceable processing cost 06. -egment >argin 0%. 00. 3!.
-ell at -plit$O2 evenue
3. raceable processing costs 066. -egment >argin
061 Pr 06( Pr$ 06+ T $%#& 9 %#& : $&al (. . . 3. !0, 6. 1,6 1. 666 units 66 units #. I% %. I10, (. I !,666 %66 6,%66 . 1 0. (, 3. !,666 666 1,666 01. I# 0!. I1#, 0#. I 6,666 %66 %#,%66 0(. 0. 0. 03. 36. 31. 3#. I# 3%. I1!, 3(. I 6,066 066 %#,66 3. 30. 33. 6 6 6 061. I# 06!. I1!, 06#. I 6,066 066 %#,66
06%. a. he disadvantage of processing 8roduct P further is I066. 06(. 4I#6,666 $ I#6,0665 06. b. he advantage of processing 8roduct Q further is I66. 06. 4I1#,%66 $ I1!,0665 060. 063. . *ropping product line 4Appendix ; 016. 011. 01!. .1+ F$ .1, H$% .1 O) .16 T$& %&ais s"s "lisks al 01. evenue 010. I1 013. I1% 0!6. I3 0!1. I% (,666 (,666 (,666 1(,666 0!!. Jariable 0!#. 0!%. % 0!(. % 0!. 1 costs 0(,666 #,666 (,666 #,666 0!. Bontribution 0!0. I3 0!3. I16 0#6. I( 0#1. I! margin 6,666 !,666 6,666 %!,666 0#!. raceable 0##. 0#%. # 0#(. # 0#. xed costs #6,666 #,666 6,666 3#,666 .+0 S"!*"& .+. < .+3 < .,4 <( .,1 <1 Pr$=& 64'444 63'444 4'444 ,3'444 0%!. &ncreased 0%#. 0%%. 0%(. 0%. revenue if Obelis/ 0%. 0%0. 0%3. 0(6. 0(1. 0(!. 0(#. ., C$&i%" . Dis#$&i%" 0(. .0 F .. O .3 T .64 F .61 O .6( T
6-+4
D"#isi$ Maki! i &h" Sh$r& T"r*
0#.
evenue
06. Jariable costs 0. raceable xed costs 00%. Bommon xed costs 031. Eet &ncome
$%&ai 0%. I 1(,666
)"lisk 0(. I 3(,666
$&al 0. I !6,666
01. 0 0!. % (,666 (,666 00. # 03. # 6,666 6,666 00(. 00. # #(,666 (,666 03!. I 03#. 4 !(,666 I1(,66 65
0#. 1 #6,666 006. 6,666 00. 6,666 03%. I 16,666
$%&ai )"lisk $&al 0. I 00. 6 03. I 10#,(6 10#,( 6 0%. 0 0(. 6 0. 0 3,!(6 3,!(6 001. # 00!. 6 00#. # 6,666 6,666 000. 003. 6 036. 6,666 6,666 03(. 4I 03. 6 03. 4 (,(665 I(,(665
030. 033. Breatives owner should not discontinue its Obelis/ line of products. he increase in revenue from the additional fountain sales does not o2set the portion of common xed costs that the Obelis/ absorbs.
6-+1
Balakrisha/Maa!"rial A##$%&i!' (" 344
E $ Cha&"r C$&"&
341
Sh$r& As7"r
1. )hat do short$term decisions deal with in most business environmentsF 36!. !. )hat does the term ?capacity@ meanF 36#. #. )hy is the decision of how much capacity to put in place a long$term decisionF 36%. %. )hat are the two broad classications of short$term decisionsF List two examples of each. 36(. (. ;rie'y describe the incremental or di2erential method approach to ma/ing short$ term decisions. 36. . ;rie'y describe the totals or the gross approach to ma/ing short$term decisions. 36. . )hich approach, incremental or totals, re=uires more computationsF )hyF 360. 0. )hen might the gross approach be preferable to the incremental approach for ma/ing short$term decisionsF 363. 3. Are sales promotion decisions typically responses to an excess supply situation or an excess demand situationF 316. 16.)hat is a ma/e$or$buy decisionF 311. 11.)hen does it ma/e sense to compute the contribution margin per unit of a particular resource in ma/ing short$term decisionsF 31( 1!.)hat is the general rule for allocating a scarce resource to ma/ing multiple productsF 31#. 1#. Gow might managers deal with the possible long$term implications that may arise from short$run decisionsF
6-+(
D"#isi$ Maki! i &h" Sh$r& T"r* 31,
S$l%&i$s &$ Sh$r& As7"r
1. 4LO15 he temporary gaps between the demand and supply of available capacity. 31(. !. 4LO$15 he maximum volume of activity that a company can sustain with available resources. 31. #. 4LO$15 ;ecause organi:ations ma/e capacity decisions based on the expected volume of operations over a hori:on spanning many years. hey build plants, buy e=uipment, rent o7ce space, and hire salaried personnel in anticipation of the demand for their products and services. 31. %. 4LO$15 415 *ecisions that deal with excess supply. Dxamples include reducing prices to stimulate demand, running special promotions, processing special orders, and using extra capacity to ma/e production inputs in$houseK 4!5 *ecisions that deal with excess demand. Dxamples include increasing prices to ta/e advantage of favorable demand conditions, meeting additional demand by outsourcing production, and altering the product mix to focus on the most protable ones. 310. (. 4LO$!5 his method focuses only on those costs and revenues that di2er from the benchmar/ option. 313. . 4LO$!5 his method considers the gross revenues and costs associated with each option, rather than the incremental amounts relative to the benchmar/ option. 3!6. . 4LO$!5 he totals approach re=uires more computations because it includes some noncontrollable benets and costs. 3!1. 0. 4LO$!5 &n decisions involving many costs and benets – it helps us ensure that we do not ?forget@ to include a relevant cost or benet. 3!!. 3. 4LO$#5 Dxcess supply – usually, the rm cuts prices to stimulate demand. 3!#. 16.4LO$#5 &n a ma/e or buy decision, the rm is deciding whether to ma/e a product, or piece thereof, internally or outsource and buy them from a supplier. 3!%. 11.4LO$%5 )hen demand is high and a resource is in short supply. 3!(. 1!.4LO$%5 o maximi:e prot when capacity is in short supply, maximi:e the contribution margin per unit of capacity. 3!. 1#.4LO$(5 ypically on a =ualitative basis – by considering how customers, suppliers, and competitors might respond to the decision being made.
6-++
Balakrisha/Maa!"rial A##$%&i!' ("
3!.
Sh$r& Essa8
1. he denition of ?short$term@ depends on the business context. )hat would Reneral >otors consider as short$termF &s this period longer than what a ba/ery would consider as short$termF )hyF 3!0. !. Automobile dealers fre=uently advertise sales because their lots are ?over'owing.@ he ads suggest a shortage of storage capacity but the price$ cutting action indicates a demand shortfall. Gow can you reconcile these seemingly contradictory inferencesF 3!3. #. &dentify the one resource whose daily supply is xed for each person. Gow could we improve the e2ectiveness with which we consume this resourceF 3#6. %. -ome people argue that the gross method is also, at some level, ?incremental.@ Dvaluate this argument. 3#1. (. )hen faced with a sudden spurt in demand, why does it sometimes ma/e sense for a company to increase pricesF "or example, why do airlines raise fares during pea/ travel periodsF )hy might it not be a good idea for consulting companiesF 3#!. . &n periods of excess capacity, does it ma/e sense for a manufacturing company to produce some products to stoc/ 4i.e., build up inventory5 for sale in future periods of high demandF Rive two examples of industries where this might be a good idea. Rive two examples where it might be a bad idea. 3##. . Gow does holding inventory help reduce the expected gap between available capacity and uncertain demandF 3#%. 0. &nventory is one mechanism that a rm could use to protect itself from the impact of 'uctuating demand. )hat are other long$term strategies a company could adopt to insulate itself against uncertain demandF 3#(. 3. Often, the capacity of the most expensive machine denes a plants capacity. hat is, rms will deliberately install excess capacity in ?cheap@ resources. )hy might this practice be optimalF 3#. 16.he general allocation procedure in the text assumes few constraints on how we could use resources. )hy might this general ru le not hold when individual uses re=uire a minimum amount of the resourceF 4"or example, if we are allocating space, each use might need a minimum of 16 units of space.5 Gow might we modify our approach to incorporate lumpy uses of capacityF 3#. 11.Gow does the notion of maximi:ing the contribution per unit of the scarce resource apply when some products have minimum production =uantitiesF 3#0.
6-+,
D"#isi$ Maki! i &h" Sh$r& T"r*
1!.Outsourcing is the practice of having an external party ta/e over some business andNor manufacturing processes. Gow does outsourcing change a rms cost structure and, therefore, its ability to be nimble in responding to competitionF )hat are some long$term costs and benets of outsourcingF 3#3. 1#.-uppose that buying a component is estimated to save I(6,666 annually over ma/ing it in$house. Gowever, outsourcing the component means that !6 long$ term employees would be laid o2, adversely a2ecting employee morale. Gow might a manager trade o2 these two factorsF
6-+
Balakrisha/Maa!"rial A##$%&i!' (" 3,4
S$l%&i$s &$ Sh$r& Essa8
1. 4LO$15 Qes, the denition of what is short$term and what is long$term depends on the business context. "or Reneral >otors anywhere from few wee/s to a few months may be considered short$term, as pricing and promotion decisions depend on how fast di2erent models of cars and truc/s are moving from the dealers inventories. "or a ba/er, a day or two days may be too long as ba/ed goods do not retain their ?freshness for long. hus, product characteristics often play a critical role in determining how ?long@ the short$term hori:on is. 3%1. !. 4LO$15 he reason why the lots are over'owing is that vehicles are not being sold at the expected rate. 9nsold vehicles occupy space in the lot. hus, it is not correct to dene capacity in terms of the lot space available. ather, capacity should be dened in terms the number of vehicles that can potentially be sold per day. )hen demand falls short of supply based on the anticipated number of vehicles to be sold per day, lots over'ow, and price$cutting and other promotions become necessary to move the vehicles. 3%!. #. 4LO$15 >ost of us drive to wor/, and so the demand for gasoline is fairly stable. One way to economi:e on gasoline consumption is to car pool. 3%#. %. LO$!5 Qes, it is. he gross method considers all cash in'ows and cash out'ows that are associated with the options being considered in the context of a particular decision, even though some of th em may be non$controllable. ;ut, it does not consider cash 'ows associated with many other decisions that the companies may be considering. "rom an overall organi:ational standpoint, each decision has an incremental e2ect, and, therefore, the gross method is also incremental when viewed in this context. 3%%. (. 4LO$#, LO$(5 &ncreasing prices is a natural way of decreasing demand. &n fact, in most mar/et settings, demand for a product decreases as its price increases. )hen a rm does not have enough capacity to meet a sudden spurt in demand, it can reduce the demand by increasing prices and ?turning away@ some customers to a point where the demand can be met. he airline industry is a good example. &n pea/ times, an increase in airfare induces some travelers to see/ other means of travel or postpone their travels. Only those that are able to a2ord the higher prices, or have rigid and noncancelable schedules, will continue to travel. Airline companies usually face no long$term adverse implications from increasing prices to deal with pea/ demand situations. Air travelers usually understand this behavior and plan their travel accordingly. On the other hand, consulting companies rely on longstanding relationships with their customers. aising their rates when their business is good usually bac/res because it hurts reputation and goodwill in the long$run. 3%(. . 4LO$#5 Qes, it does. his is typically referred to as ?production smoothing@ and ma/es good business sense as long the product is storable for sale in the future period, and as long as inventory carrying costs are manageable. he toy industry and the apparels industry are good examples. 3%.
6-+6
D"#isi$ Maki! i &h" Sh$r& T"r*
. 4LO$#5 Bompanies can produce and stoc/ up during periods of lean demand to be ready for pea/ periods whenever demand outstrips capacity. Gowever, such use of inventory is benecial when demand follows reasonably predictable cycles of high and low demand. On the other hand, whenever demand is low and there is considerable uncertainty as to whether demand would rise again, producing and stoc/ing for future may bac/re. 0. 4LO$#5 One strategy is to invest less in capacity and rely more on outsourcing. ;y doing so, the company would embrace a cost structure with less xed costs and more variable costs i.e., a cost structure with lower operating leverage. Another strategy to nd other uses for capacity so that excess capacity can be put to protable alternate use during periods of lean demand 4such as accepting special custom +obs, turn /ey pro+ects and so on5. 3%. 3. 4LO$%5 he idea is to ma/e the most protable use of critical and most expensive resources. he opportunity cost of such a resource is by assumption, high. Any situation in which such a resource has to wait because some other ?cheaper@ resource is in short supply is undesirable. o avoid such situations, it ma/es more economic sense to install excess capacity in other resources. 3%0. 16.4LO$%5 )hen a resource is in short supply, and it is used in a lumpy manner, calculating contribution margin per unit of the resource to allocate its use to various products is at best approximate and can often lead to wrong decisions. Advanced techni=ues such as integer programming may have to be employed to come up with the right way to allocate scarce resources to products in such settings. 3%3. 11.4LO$%5 8roducts re=uiring minimum production =uantities involve committing re=uisite amounts of capacity to these products if they are chosen production. )henever capacity is in short supply, such products may well necessitate leaving out products with higher contribution margins per scarce capacity unit in order to meet their minimum production re=uirements. he alternative is to not loc/ up capacity by scheduling such products, but instead use th e capacity to schedule products that yield lower contribution margins per unit of the scarce capacity resource. he conse=uent trade$o2 will determine whether it is protable to ma/e products with minimum production re=uirements. 3(6. 1!.4LO$(5 est mar/eting is a way to minimi:e ris/ associated with large investments. O2ering a new product often involves putting in place and committing to various organi:ational resources. Once the product is launched it is often extremely costly to cut bac/ should the product fail. 8lants and o7ces have to be closed down and people have to be red and so on. is/ of failure is an inherent part of business, and products do fail. ;ut one way to reduce this ris/ is to do a small scale launch aimed at representative customers. &f this test mar/eting e2ort fails, then a larger scale launch is unadvisable. >oreover, feedbac/ from the test mar/et is often useful in redesigning the product to reduce the ris/ of failure subse=uently. 3(1. 1#.4LO$(5 Dmployee morale is an important factor in outsourcing decisions, especially if outsourcing is a sign of things to come. Loss of morale leads to a loss in productivity which might ma/e outsourcing even more attractive. he
6-+0
Balakrisha/Maa!"rial A##$%&i!' ("
company may lose talented and experienced personnel, who may prefer +obs elsewhere to being red. >anagers therefore have to be clear about the impact of outsourcing on employee morale so that they can ma/e the appropriate trade$ o2 between immediate cost savings from outsourcing and longer$term adverse impact of a loss in morale. Bertain critical activities are better done in$house for strategic reasons, while others can be outsourced. Gowever, decision ma/ing with respect to outsourcing has to be clearly communicated to the employees to avoid disgruntlement.
6-+.
D"#isi$ Maki! i &h" Sh$r& T"r* 3(
E5"r#is"s
1. A+ay -ingh o2ers gift$wrapping services at the local mall. A+ay wraps each pac/age, regardless of si:e, in the customers choice of wrapping paper and bow for a price of I#. A+ays variable costs total I1 per pac/age wrapped, and his xed costs amount to I66 per month. *ue to the anticipated increase in demand over the holiday season, A+ay is considering hiring a helper, at a cost of I0.(6 per hour, to help him wrap pac/ages. )ith the helper, A+ay estimates that he can wrap 116 pac/ages in a 16$hour day. )ithout the helper, A+ay estimates that he can wrap 6 pac/ages in a 16$hour day. A+ay plans on operating his business for thirty 16$hour days during the holiday season. 3(#. 954. Required: 3((. a *oes A+ays decision deal with excess supply or excess demandF 3(. 3(. ) 9sing the gross approach, determine whether A+ay should hire the helper. 3(0. 3(3. # 9sing controllable cost analysis, determine whether A+ay should hire the helper. 36. 31. Assume A+ays xed costs were I1,666 rather than I66. )ould this a2ect A+ays decision 3!. to hire a helperF 3#. 3%. 3(. 3. 3. 30. !. he *[+\ Ju Bard Bompany o2ers greeting cards for every occasion at unmatched prices. he following information comes from *[+\ Jus accounting records for *ecember of the most recent yearC Rreeting cards sold 166,666 cards -elling price I1.66 per card "ixed costsC 33. >anufacturing I6.#6 per card 36. >ar/eting T administrative I6.!1 per card 31. Jariable costsC 3!. >anufacturing I6.1( per card 3#. >ar/eting T administrative I6.60 per card 3%. 975. Required: 3. *[+\ Ju has an extra stoc/ of (,666 holiday greeting cards. he company is considering two optionsC 415 holding a (6H o2 sale and 4!5 holding an 06H o2 sale. *[+\ Ju expects to sell 1,(66 cards if it holds a (6H o2 sale and %,666 cards if it holds an 06H o2 sale. he remaining cards would be discarded. )hich option should *[+\ Ju pursueF 3.
6-+3
Balakrisha/Maa!"rial A##$%&i!' ("
#. >yers yers can run the sand through a sieve to remove small roc/s and ma/e ne sand used to ll sandboxes. he process will, however, reduce the yield of sand from 1,066 tons to 366 tons. his superior grade of sand 4?sandbox@ =uality5 retails for I16 per ton. Gowever, >yers will incur I10,666 to process the sand into ?sandbox@ =uality. -hould >yers sell the coarse sand as is or process it further into sandbox =uality sandF
6-,4
D"#isi$ Maki! i &h" Sh$r& T"r* 3.+
S$l%&i$s &$ E5"r#is"s
1. 4LO1, LO!5 a. A+ays decision deals with excess demand. *ue to the holidays, A+ay expects a surge in gift$wrapping needs. o handle this surge, A+ay is considering hiring a helper. his is a/in to a manufacturing rm outsourcing some production in periods of high demand. 30%. b. )e can construct the entire BJ8 model for A+ay. )e then compare the prot under each option, selecting the option with the higher prot. )ith the information provided, we haveC 30(.
30.
303.
336. 331.
33%. *ail y revenue
33(. 4I# 6K I# × 1165
330. *ail y variable costs 166!. *ail y pay for help 166. *ail y contributio n 1616. otal contributio n
333. 4I1 × 6K I1 × 1165 166#. 46K I0.(6 × 165
1611. × #6
ow %
161%. otal xed costs
161(.
Riven
1610. t
1613.
8ro
×
166. ow 1– rows ! T #
30. ) 300. ) ithout ith Gelper Gelper 33!. 6 33#. 116 pac/ag pac/ages es per per day day 33. 33. I## I10 6.66 6.6 6 1666. 1661. 116. 6. 66 66 166%. 166(. 0(.6 6.6 6 6 1660. 1663. I1# I1! (.66 6.6 6 161!. 161#. I%,6 I#, (6.66 66 .66 161. 161. 66. 66 66 .66 14(4 14(1 <+' <+' ,444 444 44
16!!. 16!#. A+ays prot increases by <,4 4I#,%(6 – I#,6665 for the season, if he hires the helper. Accordingly, if he wishes to maximi:e prot then A+ay sh$%l hir" &h" h"l"r .
6-,1
Balakrisha/Maa!"rial A##$%&i!' ("
16!%. &n constructing the income statement for each option, we could leave out the non$controllable xed costs of I66. )hile the absolute prot numbers would change, the di2erence in prot would be preserved. hus, the gross approach provides decision ma/ers some 'exibility in terms of what is included and excluded from the income statement. c. )e compute only the incremental revenues and costs associated with a particular decision option relative to the status =uo. -ince operating without the helper is the status =uo, we haveC 16!(. 16!0. &ncremental revenue
16!. 16!3. (6 pac/ages per day × I# 16#!. (6 pac/ages per day × I1 16#(. I0.(6 × 16 hours
16!. 16#6. I
16#. &ncremental prot per day
16#0.
16#3. I
14,4 al%" $ hiri! h"l"r
16%1. I1( #6days
16#1. &ncremental variable cost 4pac/ages5 16#%. &ncremental cost 4helper5
×
16##. ( 16#. 0
14,( <
16%#. A+ay increases monthly prot by <,4 if he hires a helper. he di2erence in prot derived with controllable cost analysis exactly e=uals the di2erence in prot under the gross approach. 16%%. d. &f A+ay see/s to maximi:e prot, the #ha!" i =5" #$s&s 7ill $& al&"r his "#isi$ &$ hir" &h" h"l"r . he xed costs are e=ual under each option and are not relevant for this particular problem. Dven though the gross approach uses xed costs, they ?wash@ because they are included in the total cost for both options. 16%(.
6-,(
D"#isi$ Maki! i &h" Sh$r& T"r*
!. 4LO!5 -imilar to the -uperior Bereals problem in the text, the /ey to this problem is to reali:e that the variable costs associated with manufacturing the greeting cards are sun/ – thus, they are not relevant to *[+\ Jus decision. Additionally, *[+\ Jus xed costs are non$controllable for the decision, as they are not expected to change. hus, the problem is one of revenue maximi:ation. 16%. 16%. At a (6H o2 sale, *[+\ Jus prot increases by I6.(6 ] 1,(66 Y I(6. 16%0. At an 06H o2 sale, *[+\ Jus prot increases by I6.!6 ] %,666 Y I066. 16%3. 16(6. hus, *[+\ Ju maximi:es its prot by holding the 06H o2 sale, even though the resulting price is below the I6.!# 4Y I6.1(XI6.605 in variable costs associated with producing and selling a card. )hat we need to remember is that this is the variable cost of a card yet to be produced, not a card that has already been produced. 16(1. 16(!. N$&" his problem lin/s to a common business practice. -pecically, we often observe stores employing a staggered discounting strategy – the store starts with, for example, a !(H discount and increases the discount rate over time 4perhaps by as much as 1($!(H a wee/5. &n this way, the store attempts to capture as much consumer surplus 4gross revenue5 as possible by grouping customer types according to their willingness to wait and run the ris/ of having the item selling out. -uch a strategy may wor/ =uite well for *[+\ Ju – i.e., the company could sell the rst 1,(66 cards at I6.(6 and %,666 – 1,(66 Y !,(66 cards at I6.!6. ;y employing such a strategy, *[+\ Ju could earnC 16(#. 16(%. Dxpected 8rot Y 4I6.(6 ] 1,(665 X 4I6.!6 ] !,(665 Y I1,!(6. 16((. his amount represents a I%(6 4Y I1,!(6 $ I0665 increase over its best option. 16(.
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