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1.
Management must maximize sales of the product with the highest contribution margin per unit. Do you agree? Explain. 2. Managers must choose the alternative that maximizes operating income. Do you agree? Explain. 3. Broadway Printers operates a printing press with a monthly capacity of 2,000 machine-hours. Broadway has two main customers, Taylo Corporation and Kello Corporation. Data on each customer for January follow: Taylo Corp. Re Revenues Variable costs Fixed costs (allocated based on revenues) Total operating costs Operating income/(loss) Machine-hours required PhP 120,000 42,000 60,000 102,000 PhP 18,000 1,500 hours PhP 80,000 48,000 40,000 88,000 PhP ( 8,000) 500 hours PhP 200,000 90,000 100,000 190,000 PhP 10,000 2,000 hours Kello Corp. Total

The following items refer only to the preceding data. There is no connection between the items. a. Should Broadway drop the Kello Corporation business, assuming that dropping it would decrease its total fixed costs by 20 percent? ANSWER: __________ Show the basis of your answer. b. Kello Corporation indicates that it wants Broadway to do an additional PhP 80,000 worth of printing jobs during February. These jobs are identical to the existing business Broadway did for Kello in January in terms of variable costs and machine-hours required. Broadway anticipates that the business from Taylo Corporation in February would be the same as that in January. Broadway can choose to accept as much of the Taylo and Kello business for February as it wants. Assume that total fixed costs for February will be the same as the fixed costs in January. What should Broadway do? ANSWER: ____________ Show the basis of your answer. 4. Air Frisco owns a single jet aircraft and operates between San Francisco and Fiji Islands. Flights leave San Francisco on Mondays and Thursdays and depart from Fiji on Wednesdays and Saturdays. Air Frisco cannot offer any more flights between San Francisco and Fiji. Only tourist-class seats are available on its planes. An analyst has collected the following information: Seating capacity per flight Average number of passengers per flight Flights per week Flights per year Average one-way fare Variable fuel costs Food and beverage service costs (no charge to passenger) Commission to travel agents paid by Air Frisco (all tickets are booked by travel agents) Fixed annual lease costs allocated to each flight Fixed ground services (maintenance, check in, baggage handling) costs allocated to each flight Fixed flight crew salaries allocated to each flight 360 passengers 200 passengers 4 flights 208 flights $500 $14,000 per flight $20 per passenger 8% of fare $53,000 per flight $7,000 per flight $4,000 per flight

For simplicity, assume that fuel costs are unaffected by the actual number of passengers on a flight.

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a. What is the operating income that Air Frisco earns on each one-way flight between San Francisco and Fiji? ANSWER: $ __________ Show the basis of your answer. b. The Market Research Department of Air Frisco indicates that lowering the average one-way fare to $480 will increase the average number of passengers per flight to 212. Should Air Frisco lower its fare? ANSWER: __________ Show the basis of your answer. c. Travel International, a tour operator, approaches Air Frisco on the possibility of chartering its jet aircraft twice each month, first to take Travel Internationals tourists from San Francisco to Fiji and then to bring the tourists back from Fiji to San Francisco. If Air Frisco accepts Travel Internationals offer, Air Frisco will be able to offer only 184 (208 24) of its own flights each year. The terms of the charter are as follows: (i) For each one-way flight, Travel International will pay Air Frisco $75,000 to charter the plane and to use its flight crew and ground service staff; (ii) Travel International will pay for fuel costs; and (iii) Travel International will pay for all food costs. On purely financial considerations, should Air Frisco accept Travel Internationals offer? ANSWER: __________ Show the basis of your answer. What other factors should Air Frisco consider in deciding whether to charter its plane to Travel International? 5. The following are Class Companys unit costs of manufacturing and marketing a high-style pen at an output level of 20,000 units per month: Manufacturing costs Direct materials Direct manufacturing labor Variable manufacturing indirect costs Fixed manufacturing indirect costs Marketing costs Variable Fixed $1.00 2.10 0.80 0.50 1.50 0.90

The following situations refer only to the preceding data; there is no connection among the situations. Unless stated otherwise, assume a regular selling price of $6 per unit. Choose the best answer to each question. a. In an inventory of 10,000 units of the high-style pen presented in the audited balance sheet, the unit cost used should be (1) $3.50, (2) $3.50, (3) $5.00, (4) $2.20, (5) $5.90. b. The pen is usually produced and sold at the rate of 240,000 units per year (an average of 20,000 per month). The selling price is $6 per unit, which yields total annual revenues of $1,440,000. Total costs are $1,416,000, and operating income is $24,000, or $0.10 per unit. Market research estimates that unit sales could be increased by 10% if prices were cut to $5.80. Assuming the implied cost-behavior patterns continue, this action, if taken, would: (1) Decrease operating income by $7,200. (2) Decrease operating income by $0.20 per unit ($48,000) but increase operating income by 10% of revenues ($144,000) for a net increase of $96,000. (3) Decrease unit fixed costs by 10%, or $0.14, per unit, and thus decrease operating income by $0.06 ($0.20 $0.14) per unit. (4) Increase unit sales to 264,000 units, which at the $5.80 price would give total revenues of $1,531,200, and lead to costs of $5.90 per unit for 264,000 units, which would equal $1,557,600, and result in an operating loss of $26,400. (5) None of these.

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c. A contract with the government for 5,000 units of the pens calls for the reimbursement of all manufacturing costs plus a fixed fee of $1,000. No variable marketing costs are incurred on the government contract. Compare the following alternatives: Sales Each Month to Regular customers Government Alternative A 15,000 units 0 units Alternative B 15,000 units 5,000 units

Operating income under alternative B is greater than that under alternative A by (1) $1,000, (2) $2,500, (3) $3,500, (4) $300, (5) None of these. d. Assume the same data with respect to the government contract as in c, above, except that the alternatives to be compared are: Sales Each Month to Regular customers Government Alternative A 20,000 units 0 units Alternative B 15,000 units 5,000 units

Operating income under alternative B relative to that under alternative A is (1) $4,000 less, (2) $3,000 greater, (3) $6,500 less, (4) $500 greater, (5) None of these. e. The company wants to enter a foreign market in which price competition is keen. The company seeks a one-timeonly special order for 10,000 units on a minimum-unit-price basis. It expects that shipping costs for this order will amount to only $0.75 per unit, but the fixed costs of obtaining the contract will be $4,000. The company incurs no variable marketing costs other than shipping costs. Domestic business will be unaffected. The selling price to break even is (1) $3.50, (2) $4.15, (3) $4.25, (4) $3.00, (5) $5.00. f. The company has an inventory of 1,000 units of pens that must be sold immediately; otherwise, the inventory will be worthless. The unit cost that is relevant for establishing the minimum selling price is (1) $4.50, (2) $4.00, (3) $3.00, (4) $5.90, (5) $1.50.

g. A proposal is received from an outside supplier who will make and ship these high style pens directly to the Class Companys customers as sales orders are forwarded from Classs sales staff. Classs fixed marketing costs will be unaffected, but its variable marketing costs will be slashed by 20 percent. Classs plant will be idle, but its fixed manufacturing overhead will continue at 50% of present levels. How much per unit would the company be able to pay the supplier without decreasing operating income? (1) $4.75, (2) $3.95, (3) $2.95, (4) $5.35, (5) None of these. 6. The San Carlos Company is in the electrical supplies business with eight product lines. Operating data for one of the products (XT-107) for the month just ended are as shown on the next page. Abrams, Inc., an instruments company, has a problem with its preferred supplier of XT-107 components. This supplier has had a three-week labor strike and will not be able to supply Abrams 3,000 units next month. Abrams approaches Sarah Cuenco, San Carlos Companys sales representative, about providing 3,000 units of XT-107 at a price of PhP 80 per unit. Cuenco informs Jaime Baz, the XT-107 product manager, that she would accept a flat PhP 6,000 commission rather than the usual 15% of revenues if this special order were accepted. San Carlos has the capacity to produce 300,000 units of XT-107 each month, but demand has not exceeded 200,000 units in any month in the last year.

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Revenues (200,000 units at an average price of PhP 100) PhP 20,000,000 Variable costs Direct materials at PhP 35 per unit PhP 7,000,000 Direct manufacturing labor at PhP 10 per unit 2,000,000 Variable manufacturing overhead at PhP 5 per unit 1,000,000 Sales commissions at 15% of revenues 3,000,000 Other variable costs at PhP 5 per unit 1,000,000 Total variable costs 14,000,000 Contribution margin 6,000,000 Fixed costs 5,000,000 Operating income PhP 1,000,000 a. Should the 3,000-unit order from Abrams be accepted? (Assume the same cost structure that existed in the previous month.) ANSWER: _____ Show the basis of your answer. b. Baz ponders whether to accept the 3,000-unit special order. He is afraid of the precedent that might be set by cutting the price. He says, The price is below our cost of PhP 95 per unit. I think we should quote a full price, or Abrams will expect favored treatment again and again if we continue to do business with them. Do you agree with Baz? ANSWER: _____ Show the basis of your answer. 7. Paul Diamond is the owner of the Galaxy chain of four-star prestige hotels located in Chicago, London, Los Angeles, Montreal, New York, Seattle, San Francisco, and Tokyo. Diamond is currently struggling to set weekend rates for the San Francisco hotel (the San Francisco Galaxy). From Sunday through Thursday, the Galaxy has an average occupancy rate of 90 percent. On Friday and Saturday nights, however, average occupancy declines to less than 30 percent. Galaxys major customers are business travelers who stay mainly Sunday through Thursday. The current room rate at the Galaxy is $150 a night for single occupancy and $180 a night for double occupancy. These rates apply seven nights a week. For many years, Diamond has resisted having rates for Friday and Saturday nights that are different from those for the remainder of the week. Diamond has long believed that price reductions convey a non-prestige impression to his guests. The San Francisco Galaxy highly values its reputation for treating its guests as royalty. Most room costs at the Galaxy are fixed on a short-stay (per night) basis. Diamond estimates the variable costs of servicing each room to be $20 a night per single occupancy and $22 a night per double occupancy. Many prestige hotels in San Francisco offer special weekend rates (Friday and/or Saturday) that are up to 50% lower than their Sunday-through-Thursday rates. These weekend rates also include additional items such as a breakfast for two, a bottle of champagne, and discounted theater tickets. a. Should you recommend that Diamond reduce room rates at the San Francisco Galaxy on Friday and Saturday nights? ANSWER: _______ Show the basis of your answer. What factors should Diamond consider in this decision? b. In six months, a national sports event will be held in San Francisco. Diamond observes that several four-star prestige hotels have already advertised a Friday-through-Sunday rate for that popular weekend of $300 a night. Should Diamond charge extra for that weekend? ANSWER: __________ Show the basis of your answer.

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8. Stardom, Inc. cans peaches for sale to food distributors. All costs are classified as either manufacturing or marketing. Stardom prepares monthly budgets. The March 201x budgeted absorption-costing income statement is as follows: Revenues (1,000 crates x $100 a crate) Cost of goods sold Gross margin Marketing costs Operating income Normal markup percentage: $40,000 $60,000 = 66.7% of absorption cost $100,000 60,000 40,000 30,000 $ 10,000

Monthly costs are classified as fixed or variable (with respect to the number of crates produced for manufacturing costs and with respect to the number of crates sold for marketing costs): Manufacturing Marketing Fixed $20,000 16,000 Variable $40,000 14,000

Stardom has the capacity to can 1,500 crates per month. The relevant range in which monthly fixed manufacturing costs will be fixed is from 500 to 1,500 crates per month. a. Assume that a new customer approaches Stardom to buy 200 crates at $55 per crate. The customer does not require additional marketing effort. Additional manufacturing costs of $2,000 (for special packaging) will be required. Stardom believes that this is a one-time-only special order because the customer is discontinuing business in six weeks. Stardom is reluctant to accept this 200-crate special order because the $55 per crate price is below the $60 per crate absorption cost. Do you agree with this reasoning? ANSWER: ______ Show the basis of your answer. b. Assume that the new customer in a, above, decides to remain in business. Will this longevity affect your willingness to accept the $55 per crate offer? ANSWER: ______ Show the basis of your answer.

9. Don Bravos five-year-old car requires repairs estimated at PhP 5,400 to make it roadworthy again. His
friend, Mike Buloang, suggested that he just buy another five-year-old car instead for PhP 5,400 cash. Mike estimated the following costs for the two cars: Repair Replace Acquisition cost Repairs Monthly operating costs of gas, maintenance, insurance PhP 24,000 5,400 2,900 PhP 5,400 0 1,800

a. What costs are relevant and what costs are not relevant for this decision? Explain each answer. b. Which should Don choose? ANSWER: __________ Show the basis of your answer. c. What quantitative and qualitative factors are relevant for his decision? Explain.

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10. Premier Company manufactures gear model G37 used in several of its farm-equipment products. Annual production volume of G37 is 20,000 units. Unit costs for G37 are as follows: Direct material costs $ 55 Direct labor costs 30 Variable manufacturing support costs 25 Fixed manufacturing support costs 15 Total costs $125 Alternatively, Premier can also purchase gear model G37 from an outside supplier for $120 per unit. If G37 is outsourced, Premier can use the facility where G37 us currently manufactured for production of another gear model G49. This would save Premier $113,000 in facility rental and other costs presently incurred. Should Premier buy G37? ANSWER: ______ Show the basis of your answer. 11. Prices must cover both variable and fixed costs of production. Do you agree with this statement? Explain. 12. Healthy Hearth specializes in lunches for the health conscious. The company produces a small selection of lunch offerings each day. The menu selections may vary from day to day, but Healthy Hearth charges the same price per menu selection because it adjusts the portion sizes according to the cost of producing the selection. Healthy Hearth currently sells 5,000 meals per month, and has sufficient idle capacity to accommodate a recent order from a government agency to provide 1,000 meals next month for senior citizens. Variable costs are $3 per meal, and fixed costs total $5,000 per month. Volunteers will deliver the meals to the senior citizens at no charge. The government agency is offering to pay Healthy Hearth $3.50 per meal. Should Healthy Hearth accept this order? ANSWER: ______ Show the basis of your answer.

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