1. Waterburymanufactures and sellsrf17 a specialtyraft used
for whitewaterrafting 1Investment$2,400,000/Return on
investment20%/Operatingincome (20%/$2,400,000)
$480,000/Operating income perunit of RF17 ($480,000
20,000) $24/Full cost perunitof RF17 $300/Sellingprice ($300
+ $24) $324/Markup percentage onfull cost($24 $300)
8%/Witha 50% markupon variable costs,/Sellingprice of RF17
= Variable costperunitof RF17 1.50, so:Variable costsper
unitof RF17 = Sellingprice of RF17 = = $216…2..Fixed cost per
unit= $300 – $216 = $84/Total fixedcosts=$84 perunit*
20,000 units= $1,680,000/At a price of $348, sales= 20,000
units*0.90 18,000/Revenues($348*18,000) $6,264,000
/Variable costs($216 18,000) 3,888,000 Contribution
margin($132*18,000) 2,376,000/Fixed costs 1,680,000
/Operatingincome $696,000/If Waterbuyincreasesthe selling
price of RF17 to $348, itsoperatingincome will be
$696,000.This wouldbe more thanthe $480,000 operating
income Waterburyearnsbyselling20,000 units.ata price of
$324, so,if its forecastisaccurate,and basedon financial
considerationsalone,Waterburyshouldincrease the selling
price to $348…3. Target investmentin2009 $2,100,000/Target
returnon investment20%/Targetoperatingincome in2009,
20% $2,100,000 $420,000/Anticipatedrevenuesin2009,
$315 20,000 $6,300,000/Less targetoperatingincome in
2009 420,000/Target full costsin2009 5,880,000/Less: total
target fixedcosts1,680,000/Total target variable costsin2009
$4,200,000/Target variable costperunitin 2009, $4,200,000
20,000 = $210Vend-o-liciousmakescandy bars for vending
machinesand sellsthemto vendorsin cases of 30 bars. 1.
Target operatingincome =Returnon capital indollars=
$13,000,000 10% = $1,300,000..2.Revenues $6,000,000
Variable costs[($3.50 + $1.50) 500,000 cases2,500,000
Contributionmargin3,500,000/Fixedcosts($1,000,000 +
$700,000 + $500,000) 2,200,000Operating income (from
requirement1) $1,300,000||Sellingprice =
$6,000,000/500,000 cases= $12 per case.Markup% onfull cost
Full cost= $2,500,000 + $2,200,000 = $4,700,000 Unitcost =
$4,700,000 ÷ 500,000 cases= $9.40 per case Markup % on full
cost = ($12 - $9.40)/9.40= 27.66%
2. 3.Budgeted Operating Income ForThe year ending
December31,20xx Revenues ($14*475,000 cases*)
$6,650,000Variable costs ($5*475,000 cases) 2,375,000
Contribution margin 4,275,000Fixed costs 2,200,000O
perating income $2,075,000 New units= 500,000 cases
95% = 475,000 Returnon investment=$2,075,000/
$13,000,000=15.96%Yes, increasingthe sellingprice isagood
ideabecause operatingincome increases withoutincreasing
investedcapital,whichresultsinahigherreturnoninvestment
. The newreturn oninvestmentexceedsthe 10% target return
on investment. AirEagle is about to introduce a daily round-
trip flightfrom NewYork to Los Angelesand isdetermining
how it shouldprice its round-triptickets1. If the fare is$500,a.
AirAmericawouldexpecttohave 200 businessand100
pleasure travelers’.Variablecostsper passengerwouldbe
$80.c. Contributionmarginperpassenger=$500 – $80 =
$420.If the fare is $2,000,a. Air Americowouldexpecttohave
190 businessand20 pleasure travelers .b.Variablecostsper
passengerwouldbe $180.c. Contributionmarginperpassenger
= $2,000 – $180 = $1,820.Contributionmarginfrombusiness
travelersatpricesof $500 and $2,000, respectively ,follow:At
a price of $500: $420 × 200 passengers=$ 84,000At a price of
$2,000: $1,820 × 190 passengers=$345,800 AirAmerico
wouldmaximizecontributionmarginandoperatingincomeby
chargingbusinesstravelersafare of $2,000.Contribution
marginfrom pleasure travelersatpricesof $500 and$2,000,
respectively ,follow :Ataprice of $500: $420 × 100
passengers=$42,000At a price of $2,000: $1,820 × 20
passengers=$36,400Air Americowouldmaximizecontribution
marginand operatingincome bycharging pleasure travelersa
fare of $500. AirAmericowouldmaximizecontributionmargin
and operatingincome byaprice differentiationstrategy,
where businesstravelersare charged$2,000and pleasure
travelers$500.In decidingbetweenthe alternative prices,all
othercosts suchas fuel costs,allocated annual lease costs,
allocatedgroundservicescosts,andallocatedflightcrew
salariesare irrelevant.Why?Because these costswill not
change whateverprice AirAmericochoosesto charge. 2. The
elasticityof demandof the twoclassesof passengers drives
the differentdemandsof the travelers.Businesstravelersare
relativelyprice insensitive becausetheymustgettotheir
destinationduringthe week(exclusive of weekends) andtheir
faresare paidby theircompanies.A 300% increase infares
from$500 to $2,000 will deteronly5% of the business
passengers fromflyingwithAirAmericoIncontrast,a similar
fare increase will leadtoan80% dropin pleasure travelerswho
are payingfortheirowntravels,unlike businesstravelers,and
whomay have alternative vacation planstheycouldpursue
instead.3.Since businesstravelersoften wanttoreturnwithin
3. the same week,while pleasuretravelersoftenstayover
weekends,arequirementthataSaturday nightstayis needed
to qualify forthe $500 discountfare woulddiscriminate
betweenthe passengercategories.Thisprice discrimination is
legal because airlinesare service companiesratherthan
manufacturingcompaniesandbecause thesepracticesdonot,
nor are theyintendedto,destroycompetition.following
financial data apply to the DVD production plant of the Dill
Company for 1 Relevantrevenues,$4.00*1,000 $4,000
Relevantcosts Directmaterials,$1.60* 1,000 $1,600
Directmanufacturinglabor,$0.90*1,000 900Variable
manufacturingoverhead,$0.70 * 1,000 700Variable selling
costs,0.05 *$4,000 200Total relevantcosts 3,400Increase in
operatingincome $ 600 Thiscalculationassumesthat:a.The
monthlyfixedmanufacturingoverheadof $150,000 and
$65,000 of monthlyfixed marketingcostswillbe unchangedby
acceptance of the 1,000 unitorder.b.The price charged and
the volumessoldtoothercustomersare not affectedbythe
special order. 2. The president’sreasoningisdefectiveonat
leasttwocounts :a. The inclusionof irrelevantcosts––
assumingthe monthlyfixed manufacturingoverhead of
$150,000 will be unchanged;itisirrelevanttothe decision .b.
The exclusionof relevantcosts––variablesellingcosts(5% of
the sellingprice) are excluded. 3. Keyissuesare:a.Will the
existingcustomerbase demandprice reductions?If this1,000-
tape order isnotindependentof othersales,cuttingthe price
from$5.00 to $4.00 can have a large negative effectontotal
revenues.b.Isthe 1,000-tape order a one-time-onlyorder,oris
there the possibilityof salesin subsequentmonths?The fact
that the customerisnot inDill Company’s“normal
marketingchannels” doesnotnecessarilymeanitisa one-
time-onlyorder.Indeed,the sale couldwell openanew
marketingchannel.Dill Companyshouldbe reluctant to
consideronlyshort-runvariablecostsforpricinglong-run
business. Metal RecyclingandSalvage has just beengiventhe
opportunity to salvage scrap metal and other materialsfrom
an old industrial site….ProjectedLife Cycle Income Statement.
Revenues[$500*(16,000 + 4,800)] $10,400,000/Variable costs:
Production[$225*(16,000 + 4,800)] 4,680,000/Distribution
[($20*16,000) + ($22*4,800)] 425,600/Contributionmargin
5,294,400/Fixed costs:/Designcosts700,000/Production
($9,000*48 mos.) 432,000/Marketing [($3,000*32 mos.) +
($1,000*16 mos.)] 112,000/Distribution[($2,000*32 mos.) +
($1,000*16 mos.)] 80,000=Life cycle operatingincome $
3,970,400 , Average profit perdesk = $3,970,400 (16,000+
4,800)= $190.88 ProjectedLife Cycle Income Statement
Revenues($400*16,000) $6,400,000/Variable costs:
Production($225*16,000) 3,600,000/Distribution($20*16,000)
320,000/Contributionmargin2,480,000/Fixed costs:/Design
4. costs 700,000/Production ($9,000*32 mos.) 288,000/
Marketing($3,000*32 mos.) 96,000/Distribution($2,000*32
mos.) 64,000=Life cycle operatingincome $1,332,000
The newdeskdesignisstill profitable evenif FFMdropsthe
productafter only32 monthsofproduction.However,the
operatingincome perunitfallstoonly( $1,332,000/16000 )=
83.25per desk, 3..Life cycle operatingincome (requirement2)
$1,332,000Additional fixed productioncosts($9,000*16 mos.)
144,000Revised life cycle operatingincome $1,188,000No, the
answerdoesnotchange evenif FFMcontinuestoincurthe
fixedproductioncostsforthefull48months.The revised
operatingincome forthe new executive desk becomes
$1,188,000,which translatesinto( $1,188,000/16000)= $74.25
operatingincome perdesk. Mid=Dairy, maker of specialty
cheeses,producesasoftcheese from the milk of Holstein
cows raised on a special corn-baseddiet 1Perkilogramof hard
cheese=Milk(10liters * $1.50 per liter) $1+/Direct
manufacturinglabor5+Variable manufacturingoverhead3
+Fixedmanufacturingcostallocated6=Total manufacturing
cost $29 If VermontHillscanget all the Holsteinmilkitneeds,
and has sufficientproductioncapacity, then,the minimum
price perkiloit shouldcharge forthe hard cheese isthe
variable costperkilo=$15+5+3 = $23 per kilo2.If milkisin
short supply,theneachkiloof hardcheese displaces2.5kilos
of softcheese(10litersof milkperkiloof hardcheese versus4
litersof milkperkiloof softcheese).Then,forthehardcheese,
the minimumprice Vermontshouldcharge isthe variable cost
perkiloof hardcheese plusthe contributionmarginfrom2.5
kilosof softcheese,or,$23 + (2.5 *$8 per kilo) =$43 per
kiloThatis,if milkisinshortsupply,Vermontshouldnotagree
to produce anyhard cheese unless the buyeriswillingtopay
at least$43 perkiloBest Test Laboratories evaluatesthe
reaction of materialsto extreme increasesin temperature.
Much of the company’searly growth was attributable
to governmentcontracts, butSingle rate = $1,262,460/106,000
testinghours=$11.91 pertestinghour/Billingrate = $11.91
1.45 = $17.27..2. Labor and supervision=$ 491,840/106,000
test-hours=$4.64 pertest-hourSetupandfacilitycosts=
$402,620 = $503.275 persetuphour800 setuphours
Utilities=$368,000/10000= $36.80 per MH particular htt act
totalLabor and supervision(60%,40%) $295,104 $196,736 $
491,840/Setup andfacilitycost(25%, 75%) 100,655 301,965
402,620/Utilities(50%, 50%) 184,000 184,000 368,000/Total
cost $579,759 $682,701 $1,262,460/Number of testinghours
TH =Costper testinghour$ (579759/63600)9.12 per TH $
(682701/42400)16.10 per TH /Markup 9.12×1.45=13.22 ,16×
1.45=23.35 Billingrate pertestinghour 106,000 testinghours
60%= 63,600 TH; 106,000 testinghours*40% = 42,400 TH
The billingratesbasedonthe activity-basedcoststructure
5. make more sense.These billingrates reflectthe waysthe
testingproceduresconsume the firmsresource sb4. To stay
competitive,BestTestneedstobe more efficientin arctic
testing.Roughly 44%of arctic testing’s total cost(301,965
/682,701=44%) occurs in setupsandfacilitycosts.Perhapsthe
setupactivity canbe redesignedtoachieve costsaving alarge
labor contractor, suppliescontract labor to building-
construction companies Revenues (1,000crates at $100 per
crate) $100,000-(Variable costs:Manufacturing$40,000
Marketing14,000=Total variable costs54,000)=Contribution
margin46,000-(Fixedcosts:Manufacturing$20,000Marketing
16,000=Total fixedcosts36,000)=Operating income $
10,000Normal markuppercentage:$46,000 ÷ $54,000 =
85.19% of total variable costs 2Onlythe manufacturing-cost
categoryis relevanttoconsideringthisspecial order;no
additional marketingcostswill be incurred.The relevant
manufacturingcostsforthe 200-crate special orderare.
Variable manufacturingcostperunit($40*200)crates $ 8,000
Special packaging2,000=Relevant manufacturing costs
$10,000 Anyprice above $50 per crate ($10,000 ÷ 200) will
make a positive contributiontooperatingincome.Therefore,
basedon financial considerations,Stardomshouldacceptthe
200-cratespecial orderat $55 percrate that will generate
revenuesof $11,000 ($55 200) and relevant(incremental)
costs of $10,000.The reasoningbasedona comparisonof $55
percrate price withthe $60 percrateabsorptioncostignores
monthlycost-volume-profitrelationships.The $60 percrate
absorption costincludesa$20 per crate cost componentthat
isirrelevanttothe special order.The relevant range forthe
fixedmanufacturingcostsisfrom500 to 1,500 crates per
month;the special orderwill increase productionfrom1,000
to 1,200 cratesper month.Furthermore,the specialorder
..e distributesvideogamesto retail storesand -Income
Statement, Revenues(12,000 disks /22 per disk) $264,000
Materials(12,000 disks/ $15 per disk) 180,000=Gross margin
84,000Ordering (40 vendors /$250 pervendor) 10,000
Cataloging(20 newtitles /$100 per title) 2,000Deliveryand
support(400 deliveries/ $15 perdelivery)6,000Billingand
collection(300customers/ $50 per customer) 15,000
OperatingIncome $ 51,000 Rate of returnon investment
($51,000/$300,000 ) 17.00% 2 Operating
Income Statement,Revenues(12,000 disks $18 perdisk)
$216,000
Materials(12,000 disks $12 perdisk) 144,000
Gross margin72,000
Ordering(40 vendors $250 per vendor) 10,000
Cataloging(20 newtitles $100 pertitle) 2,000
Deliveryandsupport(400 deliveries $15 perdelivery) 6,000
