EXERCISE 1-25 (25 MINUTES)

1.

Measuring inventory costs is most closely associated with the first two
objectives of managerial accounting activity: (1) providing information for
decision making and planning, and (2) assisting managers in directing and
controlling operational activities. Since inventory costs are used in external
financial reports, they are also relevant to measuring the performance of
managers and subunits within the organization.

2.

Estimating costs is particularly relevant to the objective of providing

information for decision making and planning.

3.

Measuring operating costs is relevant to all of the objectives of managerial

accounting activity.

4.

Comparing operating statistics such as those mentioned for a hotel is

particularly relevant to the following objective of managerial accounting:
Assessing the organization's competitive position and working with other
managers to ensure the organization's long-run competitiveness in its
industry.

5.

Developing a bonus reward system for managerial personnel is an example of

motivating managers and other employees toward the organization's goals. To
be effective, the bonus system must provide incentives for managers to work
toward achieving those goals.

6.

Comparing actual and planned costs is consistent with two objectives of

managerial accounting activity: (1) assisting managers in controlling
operations, and (2) measuring the performance of activities, subunits,
managers, and other employees within the organization.

7.

Determining manufacturing costs is related to all of the objectives of

managerial accounting. It is especially closely related to the objective of
providing information for decision making and planning.

EXERCISE 2-24 (20 MINUTES)

1.

Advertising costs: Period cost, fixed

2.

Straight-line depreciation: Product cost, fixed, manufacturing overhead

3.

Wages of assembly-line personnel: Product cost, variable, direct labor

4.

Delivery costs on customer shipments: Period cost, variable

5.

Newsprint consumed: Product cost, variable, direct material

6.

Plant insurance: Product cost, fixed, manufacturing overhead

7.

Glass costs: Product cost, variable, direct material

8.

Tire costs: Product cost, variable, direct material

9.

Sales commissions: Period cost, variable

10.

Wood glue: Product cost, variable, either direct material or manufacturing

overhead (i.e., indirect material) depending on how significant the cost is

11.

Wages of security guards: Product cost, variable, manufacturing overhead

12.

Salary of financial vice-president: Period cost, fixed

EXERCISE 2-28 (25 MINUTES)

1.

ALHAMBRA ALUMINUM COMPANY

SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED DECEMBER 31, 20X1
Direct material:
Raw-material inventory, January 1.........................................
Add: Purchases of raw material.............................................
Raw material available for use................................................
Deduct: Raw-material inventory, December 31.....................
Raw material used...................................................................
Direct labor....................................................................................
Manufacturing overhead:
Indirect material.......................................................................
Indirect labor............................................................................
Depreciation on plant and equipment....................................
Utilities......................................................................................
Other.........................................................................................
Total manufacturing overhead................................................
Total manufacturing costs...........................................................
Add: Work-in-process inventory, January 1...............................
Subtotal..........................................................................................
Deduct: Work-in-process inventory, December 31.....................
Cost of goods manufactured........................................................

$ 55,000
240,000
$295,000
75,000

$ 12,000
22,000
110,000
23,000
35,000

$220,000
420,000

202,000
$842,000
110,000
$952,000
125,000
$827,000

2.

ALHAMBRA ALUMINUM COMPANY

SCHEDULE OF COST OF GOODS SOLD
FOR THE YEAR ENDED DECEMBER 31, 20X1
Finished-goods inventory, January 1............................................................
Add: Cost of goods manufactured................................................................
Cost of goods available for sale....................................................................
Deduct: Finished-goods inventory, December 31........................................
Cost of goods sold..........................................................................................

$160,000
827,000
$987,000
155,000
$832,000

EXERCISE 2-28 (CONTINUED)

3.

ALHAMBRA ALUMINUM COMPANY

INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20X1

Sales revenue..................................................................................................
Less: Cost of goods sold...............................................................................
Gross margin...................................................................................................
Selling and administrative expenses.............................................................
Income before taxes........................................................................................
Income tax expense (at 35%)..........................................................................
Net income.......................................................................................................
PROBLEM 2-40 (10 MINUTES)
Cost Item Number
1.
2.
3.
4.
5.
6.
7.
8.
9.

Product Cost or Period Cost

Product
Period*
Product
Period*
Product
Period*
Product
Product
Product

*Service industry and retail firms typically treat all costs

as operating expenses which are period expenses. Such
firms do not inventory costs.
PROBLEM 2-41 (10 MINUTES)
Cost Item
Number
1.
2.
3.
4.
5.

Direct or
Indirect
direct
direct
direct
indirect
indirect

Partially Controllable by
Department Supervisor
yes
no
yes
no
no

$1,210,000
832,000
$378,000
105,000
$273,000
95,550
$ 177,450

PROBLEM 2-42 (20 MINUTES)

1.

3 hours ($14 + $4) = $54

Notice that the overtime premium on the flight is not a direct cost of the flight.

2.

3 hours $14 .5 = $21

This is the overtime premium, which is part of Gaines' overall compensation.

3.

The overtime premium should be included in overhead and allocated across

all of the company's flights.

PROBLEM 2-42 (CONTINUED)

4.

The $87 is an opportunity cost of using Gaines on the flight departing from
San Diego on August 11. The cost should be assigned to the August 11 flight
departing from San Diego.

PROBLEM 2-43 (35 MINUTES)

1.

LAREDO LUGGAGE COMPANY

SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED DECEMBER 31, 20X2
Direct material:
Raw-material inventory, January 1............................................
Add: Purchases of raw material................................................
Raw material available for use...................................................
Deduct: Raw-material inventory, December 31........................
Raw material used......................................................................
Direct labor......................................................................................
Manufacturing overhead:
Indirect material..........................................................................
Indirect labor...............................................................................
Utilities: plant..............................................................................
Depreciation: plant and equipment...........................................
Other............................................................................................
Total manufacturing overhead...................................................
Total manufacturing costs.............................................................
Add: Work-in-process inventory, January 1.................................
Subtotal...........................................................................................
Deduct: Work-in-process inventory, December 31......................
Cost of goods manufactured.........................................................

$ 20,000
90,000
$110,000
12,500

$ 5,000
7,500
20,000
30,000
40,000

$97,500
100,000

102,500
$300,000
20,000
$320,000
15,000
$305,000

2.

LAREDO LUGGAGE COMPANY

SCHEDULE OF COST OF GOODS SOLD
FOR THE YEAR ENDED DECEMBER 31, 20X2
Finished goods inventory, January 1............................................................
Add: Cost of goods manufactured................................................................
Cost of goods available for sale....................................................................
Deduct: Finished-goods inventory, December 31........................................
Cost of goods sold..........................................................................................

$ 10,000
305,000
$315,000
25,000
$290,000

PROBLEM 2-43 (CONTINUED)

3.

LAREDO LUGGAGE COMPANY

INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20X2

Sales revenue..................................................................................................
Less: Cost of goods sold...............................................................................
Gross margin...................................................................................................
Selling and administrative expenses.............................................................
Income before taxes........................................................................................
Income tax expense........................................................................................
Net income.......................................................................................................
PROBLEM 2-50 (20 MINUTES)
1.

a, d, g, j

2.

b, c, f

3.

b, d, g, k

4.

b, c and d*, e and f and g*, k*

*The building is used for several purposes.

5.

b, c, f

6.

b, c, h

7.

b, c, f

8.

b, c, e

9.

b, c and d, e and f and g, k

The building heated by the furnace is used for several purposes.

10.

a, d, g, j

11.

a, d, g, i

12.

a, d, g, j

13.

b, c**, f
**The sign will be depreciated as a period cost.

14.

b, d, g, k

15.

a, d, g, k

$475,000
290,000
$185,000
75,000
$110,000
45,000
$65,000

PROBLEM 2-58 (25 MINUTES)

1.

Output
(.75 liter bottles)
10,000
15,000
20,000

Calculation
$212,400/10,000
$234,600/15,000
$256,800/20,000

Unit Cost
$21.24
$15.64
$12.84

The unit cost is minimized at a sales volume of 20,000 bottles.

2.

Output
Sales
(.75 liter bottles) Revenue
10,000
$216,000
15,000
270,000
20,000
288,000

Total
Costs
Profit
$212,400 $ 3,600
234,600 35,400
256,800 31,200

Profit is maximized at a production level of 15,000 bottles of wine.

3.

The 15,000-bottle level is best for the company, since it maximizes profit.

4.

The unit cost decreases as output increases, because the fixed cost per unit
declines as production and sales increase.
A lower price is required to motivate consumers to purchase a larger amount
of wine.

EXERCISE 7-24 (15 MINUTES)

1.

2.

a.

Fixed

b.

Variable

c.

Variable

d.

Fixed

e.

Semivariable (or mixed)

Production cost per month = $37,000* + $2.30X

*37,000 = $21,000 + $11,000 + $5,000

$2.30 = $1.20 + $.85 + $.25

EXERCISE 7-25 (15 MINUTES)

1.

Variable maintenance
cost per tour mile

= (18,750r-16,500r) / (30,000 miles 12,000 miles)

= .125r

r denotes the real, Brazils national currency.

Total maintenance cost at 12,000 miles.....................................................
Variable maintenance cost at 12,000 miles (.125r 12,000).....................
Fixed maintenance cost per month............................................................
2.

16,500r
1,500r
15,000r

Cost formula:
Total maintenance cost per month = 15,000r + .125rX , where X denotes tour miles
traveled during the month.

3.

Cost prediction at the 34,000-mile activity level:

Maintenance cost

15,000r + (.125r)(34,000)

19,250r

EXERCISE 7-33 (45 MINUTES)

1.

Variable utility cost per hour =

$3,800 $2,600
=
700 400

$4.00

Total utility cost at 700 hours......................................................................

Variable utility cost at 700 hours ($4.00 700 hours)...............................
Fixed cost per month...................................................................................

$ 3,800
2,800
$ 1,000

Cost formula:
Monthly utility cost = $1,000 + $4.00 X , where X denotes hours of operation.
2.

Variable-cost estimate based on the scatter diagram on the next page:

Cost at
Cost at
Difference

600 hours .......................................................................

0 hours .......................................................................
600 hours .......................................................................

Variable cost per hour = $2,500/600 hr. = $4.17 (rounded)

$3,400
900
$2,500

EXERCISE 7-33 (CONTINUED)

Scatter diagram and visually-fitted line:

Utility cost
per month
5000

4000

3000

2000

1000

0
0

100

200

300

400

500

600

700

Hours of
operation

EXERCISE 7-33 (CONTINUED)

3.

Least-square regression:
(a)

Tabulation of data:
Dependent
Variable
(cost)
Y
3,240
3,400
3,800
3,200
2,700
2,600
18,940

Month
January.....................
February....................
March........................
April...........................
May............................
June...........................
Total..........................

Independent
Variable
(hours)
X
550
600
700
500
450
400
3,200

X2
302,500
360,000
490,000
250,000
202,500
160,000
1,765,000

XY
1,782,000
2,040,000
2,660,000
1,600,000
1,215,000
1,040,000
10,337,000

(b) Calculation of parameters:

( Y )( X 2 ) ( X )( XY )
a =
n( X 2 ) ( X )( X )

= (18,940)(1,765,000) (3,200)(10,337,000) = 1,002

(6)(1,765,000) (3,200)(3,200)

b = n( XY) ( X)( Y)
n( X 2 ) ( X)( X)
=
(c)

(6)(10,337,000) (3,200)(18,940)
= 4.04
(6)(1,765,000) (3,200)(3,200)

Cost formula:
Monthly utility cost

= $1,002 + $4.04X, where X denotes hours of operation.

Variable utility cost

= $4.04 per hour of operation

EXERCISE 7-33 (CONTINUED)

4.

Cost predictions at 300 hours of operation:

(a)

High-low method:
Utility cost

(b)

$1,000 + ($4.00)(300) = $2,200

Visually-fitted line:
Utility cost

= $2,190

This cost prediction was simply read directly from the visually-fitted cost line.
This prediction will vary because of variations in the visually-fitted lines.
(c)

Regression:
Utility cost = $1,002 + ($4.04)(300) = $2,214

EXERCISE 7-34 (45 MINUTES)

1.

Least-square regression:
(a)

Tabulation of data:

Month
July..............................
August........................
September..................
October.......................
November...................
December....................
Total............................

Dependent
Variable
(cost in
thousands)
Y
54
54
57
60
54
57
336

Independent
Variable
(thousands
of
passengers)
X
16
17
16
18
15
17
99

X2
256
289
256
324
225
289
1,639

XY
864
918
912
1,080
810
969
5,553

EXERCISE 7-34 (CONTINUED)

(b) Calculation of parameters:
( Y )( X 2 ) ( X )( XY )
a =
n( X 2 ) ( X )( X )

=
b =
=
(c)

(336)(1,639) (99)(5,553)
= 29 (rounded)
(6)(1,639) (99)(99)

n( XY) ( X)( Y)
n( X 2 ) ( X)( X)
(6)(5,553) (99)(336)
= 1.636 (rounded)
(6)(1,639) (99)(99)

Cost formula:
Monthly cost of flight service = $29,000 + $1,636X, where X denotes thousands of
passengers.

2.

Calculation and interpretation of R2:

(a)

Formula for calculation:

(Y Y ') 2
R 2 =1

(Y
Y )2

where

denotes the observed value of the dependent variable (cost) at a

particular activity level.

Y'

denotes the predicted value of the dependent variable (cost)

based on the regression line, at a particular activity level.

denotes the mean (average) observation of the dependent variable

(cost).

EXERCISE 7-34 (CONTINUED)

(b)

Tabulation of data:*

Month
July.................
August............
September.....
October..........
November......
December.......
Total...............
*Y'
Y

Y
54
54
57
60
54
57

X
16
17
16
18
15
17

Predicted Cost (in

thousands)
Based on
Regression
Line Y'
[( Y Y')2]
55.176
1.383
56.812
7.907
55.176
3.327
58.448
2.409
53.540
.212
56.812
.035
15.273

[(Y Y )2]
4.000
4.000
1.000
16.000
4.000
1.000
30.000

= ($29,000 + $1,636X)/$1,000
=
Y/6 = 56

Rounded.

(c)

Calculation of R2:
R2 = 1

(d)

15.273
= .49 (rounded)
30.000

Interpretation of R2:
The coefficient of determination, R2, is a measure of the goodness of fit of the
least-squares regression line. An R2 of .49 means that 49% of the variability of
the dependent variable about its mean is explained by the variability of the
independent variable about its mean. The higher the R2, the better the regression
line fits the data. The interpretation of a high R2 is that the independent variable
is a good predictor of the behavior of the dependent variable. In cost estimation,
a high R2 means that the cost analyst can be relatively confident in the cost
predictions based on the estimated-cost behavior pattern.

PROBLEM 7-40 (40 MINUTES)

1.

Material-handling costs
$12,500
$12,000
$11,500
$11,000
2.
Visually-fitted
cost line

$10,500
$10,000
$9,500

500
The lower part of the
vertical axis has
been shortened.

1,000

1,500

2,000

2,500

Hundreds of
pounds of
equipment

PROBLEM 7-40 (CONTINUED)

2.

See graph for requirement (1).

3.

The estimate of the fixed cost is the intercept on the vertical axis.
Fixed-cost component = $9,700
To estimate the variable-cost component, choose any two points on the visually-fitted
cost line. For example, choose the following points:
Activity
0..............................................................................................
2,000........................................................................................

Cost
$ 9,700
11,700

Then proceed as follows to estimate the variable-cost component:

Variable cost per unit of activity*

$11,700 $9,700
2,000 0

= $1.00
*Pounds (in hundreds) of equipment loaded or unloaded
4.

Cost equation:
Total material-handling cost = $9,700 + $1.00X, where X denotes the number pounds
(in hundreds) of equipment loaded or unloaded during the month.

PROBLEM 7-40 (CONTINUED)

5.

High-low method:
Variable cost unit of activity* =

$12,120 $10,200
2,600 1,000

= $1.20
*Pounds (in hundreds) of equipment loaded or unloaded
Total cost at 2,600 units of activity...............................................................
Deduct: Variable cost at 2,600 units of activity (2,600 $1.20).................
Fixed cost.......................................................................................................

$12,120
3,120
$ 9,000

Cost equation based on high-low method:

Material-handling cost per month = $9,000 + $1.20X, where X denotes the number of
units of activity during the month.

PROBLEM 7-40 (CONTINUED)

6.

Memorandum
Date:

Today

To:

President, Nantucket Marine Supply

From:

I.M. Student

Subject: Material-handling cost estimates

On the basis of a scatter diagram and visually-fitted cost line, the Material-Handling
Department's monthly cost behavior was estimated as follows:
Material-handling cost per month = $9,700 + $1.00 unit of activity
A unit of activity is defined in this department as 100 pounds of equipment loaded or
unloaded at the loading dock.
Using the high-low method, the following cost estimate was obtained:
Material-handling cost per month = $9,000 + $1.20 unit of activity
The two methods yield different estimates because the high-low method uses only
two data points, ignoring the rest of the information. The method of visually fitting a
cost line, while subjective, uses all of the data available.
In this case, the two data points used by the high-low method do not appear to be
representative of the entire set of data.
7.

Predicted Material-Handling Costs

Using Visually-Fitted
Cost Line*
$11,950 = $9,700 + ($1.00)(2,250)

Using
High-Low Method
$11,700 = $9,000 + ($1.20)(2,250)

*This method is preferable, because it uses all of the data

in developing the cost equation.

PROBLEM 7-41 (45 MINUTES)

1.

Least-squares regression:
(a)

Tabulation of data:
Dependent
Variable
(cost in
thousands)
Y
11.70
11.30
11.25
10.20
11.10
12.55
12.00
11.40
12.12
11.05
11.35
11.35
137.37

Month
January.......................
February......................
March..........................
April.............................
May..............................
June............................
July..............................
August........................
September..................
October.......................
November...................
December....................
Total............................

Independent
Variable
(units of
activity in
thousands)
X
1.8
1.6
1.3
1.0
2.2
2.4
2.0
1.8
2.6
1.1
1.2
1.4
20.4

X2
3.24
2.56
1.69
1.00
4.84
5.76
4.00
3.24
6.76
1.21
1.44
1.96
37.70

XY
21.060
18.080
14.625
10.200
24.420
30.120
24.000
20.520
31.512
12.155
13.620
15.890
236.202

(b) Calculation of parameters:

( Y )( X 2 ) ( X )( XY )
a =
n( X 2 ) ( X )( X )

=
b =
=

(137.37)(37.7) (20.4)(236.202)
= 9.943 (rounded)
(12)(37.7) (20.4)(20.4)

n( XY) ( X)( Y)
n( X 2 ) ( X)( X)
(12)(236.202) (20.4)(137.37)
=.885 (rounded)
(12)(37.7) (20.4)(20.4)

PROBLEM 7-41 (CONTINUED)

(c)

Fixed- and variable-cost components:

Monthly fixed cost = $9,943*
Variable cost = $.89 per unit of activity (rounded)
*The intercept parameter (a) computed above is the cost per month in
thousands.

The slope parameter (b) calculated above is the cost in thousands of dollars per
thousand units of activity. Equivalently, it is the cost per unit of activity.

2.

Total monthly cost = $9,943 + $.89 per unit of activity

3.

Cost prediction for 2,250 units of activity:

Total monthly cost = $9,943 + ($.89)(2,250) = $11,946 (rounded)

4.

The cost predictions differ because the cost formulas differ under the three cost-estimation
methods. The high-low method, while objective, uses only two data points.
Ten observations are excluded.
The visual-fit method, while it uses all of the data, is somewhat subjective. Different
analysts may draw different cost lines.
Least-squares regression is objective, uses all of the data, and is a statistically sound
method of estimation.

Therefore, least-squares regression is the preferred method of cost estimation.

PROBLEM 7-42 (40 MINUTES)

Total course maintenance cost

1.
Step-variable
component
of maintenance
cost

$13,250
$13,200

2.
Semivariable
cost approximation

$13,150
$13,100
$13,050
$13,000

1.
Fixed component
of maintenance
cost
50

The lower part of the

vertical axis has
been shortened.

100

150

200

250
300
Number of golfers

PROBLEM 7-42 (CONTINUED)

3.

Fixed-cost component = $13,005

Variable-cost component:
Variable cost
=
per golfer

$13,205 $13,005
200 0

= $1
Cost equation:
Maintenance cost per month = $13,005 + $1X, where X denotes the number of golfers
during the month.
4.

Predicted Course Maintenance Costs

150 people tee off................................

158 people tee off................................

Using Fixed
Cost Coupled
with StepVariable Cost
Behavior
Pattern
$13,150
13,160

Using
Semivariable Cost
Approximation
$13,155
13,163

PROBLEM 7-43 (35 MINUTES)

1.

The regression equation's intercept on the vertical axis is $190. It represents the
portion of indirect material cost that does not vary with machine hours when
operating within the relevant range. The slope of the regression line is $5 per machine
hour. For every machine hour, $5 of indirect material costs are expected to be
incurred.

2.

Estimated cost of indirect material at 850 machine hours of activity:

S = $190 + ($5 850)
= $4,440

3.

Several questions should be asked:

(a)

Do the observations contain any outliers, or are they all representative of normal
operations?

(b)

Are there any mismatched time periods in the data? Are all of the indirect
material cost observations matched properly with the machine hour
observations?

(c)

Are there any allocated costs included in the indirect material cost data?

(d)

Are the cost data affected by inflation?

4.
Beginning inventory.............................................................
+ Purchases..........................................................................
Ending inventory...............................................................
Indirect material used..........................................................
5.

April
$1,300
5,900
(1,350)
$5,850

High-low method:
Variable cost per machine hour
=

difference in cost levels

difference in activity levels

$5,850 $4,200 $1,650

=
= $5.50 per machine hour
1,000 700
300

August
$1,000
6,200
(3,000)
$4,200

PROBLEM 7-43 (CONTINUED)

Fixed cost per month:
Total cost at 1,000 hours...............................................................................
Variable cost at 1,000 hours
($5.50 1,000).........................................................................................
Fixed cost.......................................................................................................

$5,850
5,500
$ 350

Equation form:
Indirect material cost = $350 + ($5.50 machine hours)
6.

The regression estimate should be recommended because it uses all of the data, not
just two pairs of observations when developing the cost equation.

CASE 2-59 (50 MINUTES)

1.

a. The previous purchase price of the endor on hand, $10.00 per gallon, and
the average cost of the endor inventory, $9.50 per gallon, are sunk costs.
These costs were incurred in the past and will have no impact on future
costs. They cannot be changed by any future action and are irrelevant to
any future decision. Although the current price of endor is $11.00 per
gallon, no endor will be purchased at this price. Thus, it too is irrelevant to
the current special order. If the order is accepted, the required 900 gallons
of endor will be replaced at a cost of $11.50 per gallon. Therefore, the real
cost of endor for the special order is $10,350 (900 $11.50).
b. The $40,000 paid by Alderon for its stock of tatooine is a sunk cost. It was
incurred in the past and is irrelevant to any future decision. The current
market price of $22 per kilogram is irrelevant, since no more tatooine will
be purchased. If the special order is accepted, Alderon will use 1,400
kilograms of its tatooine stock, thereby losing the opportunity to sell its
entire 1,900-kilogram stock for $28,000. Thus, the $28,000 is an
opportunity cost of using the tatooine in production instead of selling it to
Solo Industries. Moreover, if Alderon uses 1,400 kilograms of tatooine in
production, it will have to pay $2,000 for its remaining 500 kilograms to be
disposed of at a hazardous waste facility. This $2,000 disposal cost is an
out-of-pocket cost.
The real cost of using the tatooine in the special order is $30,000
($28,000 opportunity cost + $2,000 out-of-pocket cost).

CASE 2-59 (CONTINUED)

2.

a.

CopyFast Company would be indifferent to acquiring either the small-volume

copier, 1500S, or the medium-volume copier, 1500M, at the point where the costs
for 1500S and 1500M are equal. This point may be calculated using the following
formula, where X equals the number of copies:
(Variable costS X) + fixed costS

= (variable costM X) + fixed costM

1500S

1500M

$.07X + $4,000 = $.045X + $5,500

$.025X = $1,500
X = 60,000 copies
The conclusion is that the company would be indifferent to acquiring either the
1500S or 1500M machine at an annual volume of 60,000 copies.
b.

A decision rule for selecting the most profitable copier, when the volume can be
estimated, would establish the points where management is indifferent to each
machine. The volume where the costs are equal between alternatives can be
calculated using the following formula, where X equals the number of copies:
(Variable costS X) + fixed costS = (variable costM X) + fixed costM
For the 1500S machine compared to the 1500M machine:
1500S

1500M

$.07X + $4,000 = $.045X + $5,500

$.025X = $1,500
X = 60,000 copies
For the 1500M machine compared to the 1500L machine:
1500M

1500L

$.045X + $5,500 = $.025X + $10,000

$.02X = $4,500
X = 225,000 copies

CASE 2-59 (CONTINUED)

The decision rule is to select the alternative as shown in the following chart.
Anticipated Annual Volume
060,000
60,000225,000
225,000 and higher

3.

Optimal Model Choice

1500S
1500M
1500L

The projected donations from the wildlife show amount to $200,000 (10
percent of the TV audience at $20,000 per 1 percent of the viewership). The
projected donations from the manufacturing series amount to $150,000 (15
percent of the TV audience at $10,000 per 1 percent of the viewership).
Therefore, the differential revenue is $50,000, with the advantage going to the
wildlife show. However, if the manufacturing show is aired, the station will be
able to sell the wildlife show to network TV. Therefore, airing the wildlife show
will result in the incurrence of a $50,000 opportunity cost.
The conclusion, then, is that the station's management should be
indifferent between the two shows, since each would generate revenue of
$200,000.
Wildlife show (10 $20,000)

$200,000 donation

Manufacturing show (15 $10,000)

Manufacturing show (sell wildlife show)

$150,000 donation
50,000 sales proceeds
$200,000 total revenue