Test Bank For Accounting for Decision Making and Control for the 9th Edition Solution

Description

Test Bank For Accounting for Decision Making and Control for the 9th Edition Solution

Chapter 2

The Nature of Costs

P 2-1: Solution to Darien Industries (10 minutes)

[Relevant costs and benefits]

Current cafeteria income

Sales$12,000

Variable costs (40% × 12,000)(4,800)

Fixed costs(4,700)

Operating income$2,500

Vending machine income

Sales (12,000 × 1.4)$16,800

Darien’s share of sales

  (.16 × $16,800) 2,688

Increase in operating income$ 188

P 2-2: Negative Opportunity Costs (10 minutes)

[Opportunity cost]

Yes, when the most valuable alternative to a decision is a net cash outflow that would have occurred is now eliminated.  The opportunity cost of that decision is negative (an opportunity benefit).  For example, suppose you own a house with an in-ground swimming pool you no longer use or want.  To dig up the pool and fill in the hole costs $3,000.  You sell the house instead and the new owner wants the pool.  By selling the house, you avoid removing the pool and you save $3,000.  The decision to sell the house includes an opportunity benefit (a negative opportunity cost) of $3,000.

P 2-3: Solution to NPR  (10 minutes)

[Opportunity cost of radio listeners]

The quoted passage ignores the opportunity cost of listeners’ having to forego normal programming for on-air pledges.  While such fundraising campaigns may have a low out-of-pocket cost to NPR, if they were to consider the listeners’ opportunity cost, such campaigns may be quite costly.

P 2-4: Solution to Silky Smooth Lotions (15 minutes)

[Break even with multiple products]

Given that current production and sales are: 2,000, 4,000, and 1,000  cases of 4, 8, and 12 ounce bottles, construct of lotion bundle to consist of 2 cases of 4 ounce bottles, 4 cases of 8 ounce bottles, and 1 case of 12 ounce bottles.   The following table calculates the break-even number of lotion bundles to break even and hence the number of cases of each of the three products required to break even.

Per Case	4 ounce	8 ounce	12 ounce	Bundle
Price	$36.00	$66.00	$72.00
Variable cost	$13.00	$24.50	$27.00
Contribution margin	$23.00	$41.50	$45.00
Current production	2000	4000	1000
Cases per bundle	2	4	1
Contribution margin per bundle	$46.00	$166.00	$45.00	$257.00
Fixed costs				$771,000
Number of bundles to break even				3000
Number of cases to break even	6000	12000	3000

P 2-5: Solution to J. P. Max Department Stores (15 minutes)

[Opportunity cost of retail space]

	Home Appliances	Televisions
Profits after fixed cost allocations	$64,000	$82,000
Allocated fixed costs	7,000	8,400
Profits before fixed cost  allocations	71,000	90,400
Lease Payments	72,000	86,400
Forgone Profits	– $1,000	$  4,000

We would rent out the Home Appliance department, as lease rental receipts are more than the profits in the Home Appliance Department.  On the other hand, profits generated by the Television Department are more than the lease rentals if leased out, so we continue running the TV Department.  However, neither is being charged inventory holding costs, which could easily change the decision.

Also, one should examine externalities.  What kind of merchandise is being sold in the leased store and will this increase or decrease overall traffic and hence sales in the other departments?

P 2-6: Solution to Vintage Cellars (15 minutes)

[Average versus marginal cost]

a. The following tabulates total, marginal and average cost.

Quantity	Average Cost	Total Cost	Marginal Cost
1	$12,000	$12,000
2	10,000	20,000	$8,000
3	8,600	25,800	5,800
4	7,700	30,800	5,000
5	7,100	35,500	4,700
6	7,100	42,600	7,100
7	7,350	51,450	8,850
8	7,850	62,800	11,350
9	8,600	77,400	14,600
10	9,600	96,000	18,600

b. Marginal cost intersects average cost at minimum average cost (MC=AC=$7,100).  Or, at between 5 and 6 units AC = MC = $7,100.

c. At four units, the opportunity cost of producing and selling one more unit is $4,700.  At four units, total cost is $30,800.  At five units, total cost rises to $35,500.  The incremental cost (i.e., the opportunity cost) of producing the fifth unit is $4,700.