divisions will remain a single entity forever.

The manager is concerned that, despite t

You are the manager of an organization in America that distributes blood to hospitals in all 50
states and the District of Columbia. Arecent report indicates that nearly 50 Americans contract
HIV each year through blood transfusions. Although every pint of blood donated in the United
States undergoes a battery of nine

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Carp, Inc. wants to evaluate two methods of shipping their products. The following cash flows
are associated with the alternatives: Use an interest rate of 15% and annual cash flow analysis to
decide which is the most desirable alternative?

A new car is purchased for $12,000 with a 0% down. 9% loan the loan's length is 4 years. After
making 30 payments, the owner desires to payoff the loan's remaining balance. How much is
owed?

The demand curve for product X is given by Qdx = 460 = 4Px. a. Find the inverse demand curve.
b. How much consumer surplus do consumers receive when Px = $35? c. How much consumer
surplus do consumers receive when Px = $25? d. In general, what happens to the level of
consumer surplus as the price of a good falls?

Some equipment will be installed in a warehouse that a firm has leased for 7 years. There are two
alternatives: At any time after the equipment is installed, it has no salvage value. Assume that
Alternatives A and B will be replaced at the end of their useful lives by identical equipment with
the same costs and benefit

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A quant jock from your firm used a linear demand specification to estimate the demand for its
product and sent you a hard copy of the results. Unfortunately, some entries are missing because
the toner was low in her printer. Use the information presented at the top of the next page (page
112) to find the missing values

Answer the following questions based on the accompanying diagram. a. How much would the
firm’s revenue change if it lowered price from $12 to $10? Is demand elastic or inelastic in
this range? b. How much would the firm’s revenue change if it lowered price from $4 to $2?
Is demand elastic or inelastic in this range

You are the human resources manager for a famous retailer, and you are trying to convince the
president of the company to change the structure of employee compensation. Currently, the
company’s retail sales staff is paid a flat hourly wage of $18 per hour for each eight-hour
shift worked. You propose a new pay struct
As the owner of Barney’s Broilers—a fast-food chain—you see an increase in the demand
for broiled chicken as consumers become more health conscious and reduce their consumption of
beef and fried foods. As a result, you believe it is necessary to purchase another oven to meet the
increased demand. To finance the o

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You are in the market for a new refrigerator for your company’s lounge, and you have
narrowed the search down to two models. The energy efficient model sells for $500 and will
save you $25 at the end of each of the next five years in electricity costs. The standard model has
features similar to the energy efficient m

A year after buying her car, Anita has been offered a job in Europe. Her car load is for $15,000
at a 9% nominal interest rate for 60 months. If she can sell the car for $12,000, how much does
she get to keep after paying off the loan?

You are an assistant to a senator who chairs an ad hoc committee on reforming taxes on
telecommunication services. Based on your research, AT&T has spent over $15 million on
related paperwork and compliance costs. Moreover, depending on the locale, telecom taxes can
amount to as much as 25 percent of a consumer’s pho

Consider the following two mutually exclusive alternatives: Alternative B may be replaced with
an identical item every 20 years at the same $150 cost and will have the same $24 uniform
annual benefit. Using a 10% interest rate, and an annual cash flow analysis, determine which
alternative should be selected.

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What is the maximum amount you would pay for an asset that generates an income of $150,000
at the end of each of five years if the opportunity cost of using funds is 9 percent?

A consumer must divide $250 between the consumption of product X and product Y. The
relevant market prices are Px = $5 and Py = $10. a. Write the equation for the consumer’s
budget line. b. Illustrate the consumer’s opportunity set in a carefully labeled diagram. c.
Show how the consumer’s opportunity set changes

Suppose the demand function for a firm’s product is given by In Qdx = 3 – 0.5 In Px –
2.5 In Py + In M + 2 In A where Px = $10, Py = $4, M = $20,000, and A = $250. a. Determine
the own price elasticity of demand, and state whether demand is elastic, inelastic, or unitary
elastic. b. Determine the cross-price ela

As a marketing manager for one of the world’s largest automakers, you are responsible for
the advertising campaign for a new energy-efficient sports utility vehicle. Your support team has
prepared the following table, which summarizes the (year-end) profitability, estimated number of
vehicles sold, and average estima

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Approximately 14 million Americans are addicted to drugs and alcohol. The federal government
estimates that these addicts cost the U.S. economy $300 billion in medical expenses and lost
productivity. Despite the enormous potential market, many biotech companies have shied away
from funding research and development (R&D

Suppose the true inverse demand relation for good X is P = a + bQ + e, and you estimated the
parameters to be â = 10, b = – 2.5, σa = 1, and σb = 0.5. Find the approximate 95 percent
confidence interval for the true values of a and b.

A firm’s current profits are $550,000. These profits are expected to grow indefinitely at a
constant annual rate of 5 percent. If the firm’s opportunity cost of funds is 8 percent,
determine the value of the firm: a. The instant before it pays out current profits as dividends. b.
The instant after it pays out curre

The U.S. government spends over $15.8 billion on its Food Stamp Program to provide millions
of Americans with the means to purchase food. These stamps are redeemable for food at over
160,000 store locations throughout the nation, and they cannot be sold for cash or used to
purchase nonfood items. The average food stamp

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In a recent speech, the governor of your state announced: “One of the biggest causes of
juvenile delinquency in this state is the high rate of unemployment among 16 to 19 year olds.
The low wages offered by employers in the state have given fewer teenagers the incentive to find
summer employment. Instead of working a

According to The Wall Street Journal, merger and acquisition activity in the first quarter rose to
$5.3 billion. Approximately three-fourths of the 78 first-quarter deals occurred between
information technology (IT) companies. The largest IT transaction of the quarter was EMC’s
$625 million acquisition of VMWare. The

An owner can lease her building for $100,000 per year for three years. The explicit cost of
maintaining the building is $35,000, and the implicit cost is $50,000. All revenues are received,
and costs are borne, at the end of each year. If the interest rate is 4 percent, determine the present
value of the stream of: a.

Suppose demand and supply are given by a. Determine the equilibrium price and quantity. Show
the equilibrium graphically. b. Suppose a $6 excise tax is imposed on the good. Determine the
new equilibrium price and quantity. c. How much tax revenue does the government earn with the
$6tax?

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A few years ago, the Federal Communications Commission (FCC) eliminated a rule that required
Baby Bells to provide rivals access and discounted rates to current broadband facilities and other
networks they may build in the future. Providers of digital subscriber lines (DSL) that use the
local phone loop are particularl

It is estimated that over 90,000 students will apply to the top 30 M.B.A. programs in the United
States this year. a. Using the concept of net present value and opportunity cost, explain when it is
rational for an individual to pursue an M.B.A. degree. b. What would you expect to happen to the
number of applicants if t

As newly appointed “Energy Czar,” your goal is to reduce the total demand for residential
heating fuel in your state. You must choose one of three legislative proposals designed to
accomplish this goal: (a) A tax that would effectively increase the price of residential heating
fuel by $2; (b) A subsidy that would

Use the accompanying graph to answer these questions. a. Suppose demand is D and supply is
S0. If a price ceiling of $6 is imposed, what are the resulting shortage and full economic price? b.
Suppose demand is D and supply is S0. If a price floor of $12 is imposed, what is the resulting
surplus? What is the cost to th

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Seventy-two percent of the members of the United Food and Commercial Workers Local 655
voted to strike against Stop ’n Shop in the St. Louis area. In fear of similar union responses,
two of Stop ’n Shop’s larger rivals in the St. Louis market—Dierberg’s and
Schnuck’s—decided to lock out its union employee

Suppose one of your clients is four years away from retirement and has only $1,500 in pretax
income to devote to either a Roth or a traditional IRA. The traditional IRA permits investors to
contribute the full $1,500 since contributions to these accounts are tax-deductible, but they must
pay taxes on all future distrib

A $92,000 mortgage has a 30-year term and a 9% nominal interest rate. (a) What is the monthly
payment? (b) After the first year of payments, what fraction of the loan has been repaid? (c)
After the first 10 years of payments, what is the outstanding balance? (d) How much interest is
paid in Month 25? How much princip
A 30-year mortgage for $95,000 is issued at a 9% nominal interest rate. (a) What is the monthly
payment? (b) How long does it take to pay off the mortgage, if $1000 per month is, paid? (c)
How long does it take to pay off the mortgage, if double payments are made?

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You are the manager of a firm that sells a leading brand of alkaline batteries. A file named
Q12.xls with data on the demand for your product is available online at www.mhhe.com/baye7e.
Specifically, the file contains data on the natural logarithm of your quantity sold, price, and the
average income of consumers in var

You are the manager of a firm that receives revenues of $30,000 per year from product X and
$70,000 per year from product Y. The own price elasticity of demand for product X is –2.5,
and the cross-price elasticity of demand between product Y and X is 1.1. How much will your
firm’s total revenues (revenues from both

Suppose the supply function for product X is given by Qsx = – 50 + 0.5Px – 5Pz. a. How
much of product X is produced when Px = $500 and Pz = $30? b. How much of product X is
produced when Px = $50 and Pz = $30? c. Suppose Pz = $30. Determine the supply function and
inverse supply function for good X. Graph the inve

A 30-year mortgage for $145,000 is issued at a 6% A nominal interest rate. (a) What is the
monthly payment? (b) How long does it take to payoff the mortgage, if $1000 per month is paid?
(c) How long does it take to payoff the mortgage, if 20% extra is paid each month?

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Suppose that the total benefit and total cost from an activity are, respectively, given by the
following equations: B(Q) = 150 + 28Q – 5Q2 and C(Q) = 100 + 8Q. (Note: MB(Q) = 28 –
10Q and MC(Q) = 8.) a. Write out the equation for the net benefits. b. What are the net benefits
when Q = 1? Q = 5? c. Write out the equ

You are a manager in charge of monitoring cash flow at a company that makes photography
equipment. Traditional photography equipment comprises 80 percent of your revenues, which
grow about 2 percent annually. You recently received a preliminary report that suggests
consumers take three times more digital photographs th

Suppose demand and supply are given by Qd = 50 – P and Qs = ½ P – 10. a. What are the
equilibrium quantity and price in this market? b. Determine the quantity demanded, the quantity
supplied, and the magnitude of the surplus if a price floor of $42 is imposed in this market. c.
Determine the quantity demanded, the

The demand function good X is ln Qdx = a + b ln Px + c ln M+e, where Px is the price of good X
and M is income. Least squares regression reveals that â = 5.25, b = – 1.36, and c = – 0.14.
a. If M = 45,000 and Px = 5.69, compute the own price elasticity of demand based on these
estimates. Determine whether demand i

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It is common for supermarkets to carry both generic (store-label) and brand-name (producer-
label) varieties of sugar and other products. Many consumers view these products as perfect
substitutes, meaning that consumers are always willing to substitute a constant proportion of the
store brand for the producer brand. Con

Tara is considering leaving her current job, which pays $56,000 per year, to start a new company
that manufactures a line of special pens for personal digital assistants. Based on market research,
she can sell about 160,000 units during the first year at a price of $20 per unit. With annual
overhead costs and operating

Suppose the cross-price elasticity of demand between goods X and Y is –5. How much would
the price of good Y have to change in order to increase the consumption of good X by 50
percent?

Complete the following table and answer the accompanying questions. a. At what level of the
control variable are net benefits maximized? b. What is the relation between marginal benefit
and marginal cost at this level of the controlvariable?

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Consider the following three mutually exclusive alternatives: Assuming that Alternatives B and
C are replaced with: identical replacements at the end of their useful lives. and an 8% interest
rate, which alternative should be selected? Use an annual cash flow analysis in working this
problem.

Rapel Valley in Chile is renowned for its ability to produce high-quality wine at a fraction of the
cost of many other vineyards around the world. Rapel Valley produces over 20 million bottles of
wine annually, of which 5 million are exported to the United States. Each bottle entering the
United States is subjected to

The supply curve for product X is given by Qsx = – 340 + 10Px. a. Find the inverse supply
curve. b. How much surplus do producers receive when Qx = 350? When Qx = 1,000?

As a result of increased tensions in the Middle East, oil production is down by 1.21 million
barrels per day—a 5 percent reduction in the world’s supply of crude oil. Explain the likely
impact of this event on the market for gasoline and the market for small cars.

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In the answer to Demonstration Problem 4–2 in the text, we showed a situation in which a gift
certificate leads a consumer to purchase a greater quantity of an inferior good than he or she
would consume if given a cash gift of equal value. Is this always the case? Explain.

A pump is required for 10 years at a remote location. The pump can be driven by an electric
motor if a power line is extended to the site. Otherwise, a gasoline engine will be used. Use an
annual cash flow analysis to determine, based on the following data and a 10% interest rate, how
the pump should be powered.

Revenue at a major cellular telephone manufacturer was $1.4 billion for the nine months ending
March 2, up 97 percent over revenues for the same period last year. Management attributes the
increase in revenues to a 137 percent increase in shipments, despite a 17 percent drop in the
average blended selling price of its

For the first time in two years, Big G (the cereal division of General Mills) raised cereal prices
by 2 percent. If, as a result of this price increase, the volume of all cereal sold by Big G dropped
by 3 percent, what can you infer about the own price elasticity of demand for Big G cereal? Can
you predict whether reve

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Consider a market where supply and demand are given by Qsx = – 10 + Px and Qdx = 56 –
2Px. Suppose the government imposes a price floor of $25, and agrees to purchase any and all
units consumers do not buy at the floor price of $25 per unit. a. Determine the cost to the
government of buying firms’ unsold units. b

The demand curve for a product is given by Q x = 1,000 – 2Px + .02Pz, where Pz = $400. a.
What is the own price elasticity of demand when Px = $154? Is demand elastic or inelastic at this
price? What would happen to the firm’s revenue if it decided to charge a price below $154?
b. What is the own price elasticity o

You are the manager of a midsized company that assembles personal computers. You purchase
most components—such as random access memory (RAM)—in a competitive market. Based
on your marketing research, consumers earning over $75,000 purchase 1.3 times more RAM
than consumers with lower incomes. One morning, you pick

According to CNN, two dairy farmers challenged the legality of the funding of the “Got
Milk?” campaigns. They argued that the “Got Milk?” campaigns do little to support
milk from cows that are not injected with hormones and other sustainable agriculture products,
and therefore violate their (and other farmersâ€

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Viking InterWorks is one of many manufacturers that supplies memory products to original
equipment manufacturers (OEMs) of desktop systems. The CEO recently read an article in a
trade publication that reported the projected demand for desktop systems to be Qd desktop =
1000 – 2Pdesktop + .6M (in millions of units), w

You are a division manager at Toyota. If your marketing department estimates that the
semiannual demand for the Highlander is Q = 100,000 – 1.25P, what price should you charge
in order to maximize revenues from sales of the Highlander?

Solve Problem 6-32 for the breakeven first cost per kilometer of going under the lake.

You are the manager of a firm that produces and markets a generic type of soft drink in a
competitive market. In addition to the large number of generic products in your market, you also
compete against major brands such as Coca-Cola and Pepsi. Suppose that, due to the successful
lobbying efforts of sugar producers in

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A consumer must spend all of her income on two goods (X and Y). In each of the following
scenarios, indicate whether the equilibrium consumption of goods X and Y will increase or
decrease. Assume good X is an inferior good and good Y is a normal good. a. Income doubles. b.
Income quadruples and all prices double. c. In

The demand for good X is given by Research shows that the prices of related goods are given by
Py = $5,900 and Pz = $90, while the average income of individuals consuming this product is M
= $55,000. a. Indicate whether goods Y and Z are substitutes or complements for good X. b. Is X
an inferior or a normal good? c. H

The manager in a canned food processing plant is trying to decide between two labeling
machines. Their respective costs and benefits are as follows: Assume an interest rate of 12%.
Use annual cash flow analysis to determine which machine should be selected.

Suppose the own price elasticity of demand for good X is – 2, its income elasticity is 3, its
advertising elasticity is 4, and the cross-price elasticity of demand between it and good Y is –6.
Determine how much the consumption of this good will change if: a. The price of good X
increases by 5 percent. b. The price

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Two months ago, the owner of a car dealership (and a current football star) significantly changed
his sales manager’s compensation plan. Under the old plan, the manager was paid a salary of
$6,000 per month; under the new plan, she receives 2 percent of the sales price of each car sold.
During the past two months, th
If Starbucks’s marketing department estimates the income elasticity of demand for its coffee
to be 1.75, how will looming fears of a recession (expected to decrease consumers’ incomes
by 4 percent over the next year) impact the quantity of coffee Starbucks expects to sell?

Recently, Pacific Cellular ran a pricing trial in order to estimate the elasticity of demand for its
services. The manager selected three states that were representative of its entire service area and
increased prices by 5 percent to customers in those areas. One week later, the number of
customers enrolled in Pacificâ

Jaynet spends $20,000 per year on painting supplies and storage space. She recently received two
job offers from a famous marketing firm—one offer was for $100,000 per year, and the other
was for $90,000. However, she turned both jobs down to continue a painting career. If Jaynet
sells 20 paintings per year at a pric

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Suppose the Kalamazoo Brewing Company (KBC) currently sells its microbrews in a seven-state
area: Illinois, Indiana, Michigan, Minnesota, Mississippi, Ohio, and Wisconsin. The
company’s marketing department has collected data from its distributors in each state. These
data consist of the quantity and price (per case)

Theory of constraints, contribution margin, sensitivity analysis. Low Tech Toys (LTT) produces
dolls in two processes: molding and assembly. LTT is currently producing two models: Chatty
Chelsey and Talking Tanya. Production in the Molding Department is limited by the amount of
materials available. Production in the As

1. What is the value of a preferred stock that pays a perpetual dividend of $75 at the end of each
year when the interest rate is 4 percent? 2. Levi Strauss & Co. paid $46,532 for a 110-year-old
pair of Levi’s jeans—the oldest known pair of blue jeans—by outbidding several other
bidders in an eBay Internet auctio

You are the manager in charge of global operations at Bank Global—a large commercial bank
that operates in a number of countries around the world. You must decide whether or not to
launch a new advertising campaign in the U.S. market. Your accounting department has provided
the accompanying statement, which summarize

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Uncle Elmo needs to replace the family privy. The local sanitary engineering firm has submitted
two alternative structural proposals with respective cost estimates as shown. Which construction
should Uncle Elmo choose if his minimum attractive rate of return is 6%. Use both a present
worth and annual cost approach in y
Suppose nominal GDP in 2005 was $14 trillion, and in 2006 it was $15 trillion. The general
price index in 2005 was 100, and in 2006 it was 103. Between 2005 and 2006, real GDP rose by
what percent

ROI and RI. (D. Kleespie, adapted) The Outdoor Sports Company produces a wide variety of
outdoor sports equipment. Its newest division, Golf Technology, manufactures and sells a single
product: AccuDriver, a golf club that uses global positioning satellite technology to improve the
accuracy of golfers’ shots. The dem

Division managers’ compensation, levers of control (continuation of 23-32). Murdoch

Turner seeks your advice on revising the existing bonus plan for division managers of News
Mogul Group. Assume division managers do not like bearing risk. Turner is considering three
ideas: Make each division manager’s compensation

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Regression, activity-based costing, choosing cost drivers. Newroute Manufacturing has been
using activity-based costing to determine the cost of product X-678. One of the activities,
“Inspection,” occurs just before the product is finished. Newroute inspects every 10th unit,
and has been using “number of units in

Quality improvement relevant costs, and relevant revenues. The Tan Corporation uses multicolor
molding to make plastic lamps. The molding operation has a capacity of 200,000 units per year.
The demand for lamps is very strong. Tan will be able to sell whatever output quantities it can
produce at$40 per lamp. Tan can st

Estimating a cost function, high-low method. Reisen Travel offers helicopter service from
suburban towns to John F. Kennedy International Airport in New York City. Each of its 10
helicopters makes between 1,000 and 2,000 round-trips per year. The records indicate that a
helicopter that has made 1,000 round-trips in re

Multinational transfer pricing, effect of alternative transfer-pricing methods, global income tax
minimization. User Friendly Computer, Inc., with headquarters in San Francisco, manufactures
and sells a desktop computer. User Friendly has three divisions, each of which is located in a
different country: a. China Divis

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High-low, regression Pat Flip is the new manager of the materials storeroom for Serth
manufacturing. Pat has been asked to estimate future monthly purchase costs for part #4599,
used in two of Serth’s products. Pat has purchase cost and quantity data for the past nine
months as follows: Estimated monthly purchases
Account analysis. Raymondo’s Restaurant wants to find an equation to estimate monthly
utility costs. Raymondo’s has only been in business for one month, January 2008, and has
the following information for utilities: a. Electricity is billed by kilowatt hour. According to its
first bill, Raymondo’s paid $573 for

Evaluating managers, ROI, DuPont method, value-chain analysis of cost structure. Peach
Computer Corporation is the largest personal computer company in the world. The CEO of
Peach is retiring, and the board of directors is considering external candidates to fill the position.
The board’s top two choices are CEOs Pete

Financial and nonfinancial performance measures, goal congruence. (CMA, adapted) Summit
Equipment specializes in the manufacture of medical equipment, a field that has become
increasingly competitive. Approximately two years ago, Ben Harrington, president of Summit,
decided to revise the bonus plan (based, at the time,

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Ethics and quality. Information from a quality report for 2009 prepared by Lindsey Williams,
assistant controller of Citocell, a manufacturer of electric motors, is as follows: Davey Evans, the
plant manager of Citocell, is eligible for a bonus if the total costs of quality as a percentage of
revenues are less than 10

High-low method, alternative regression functions, accrual accounting adjustments, ethics.

Trevor Kennedy, the cost analyst at a can manufacturing plant of United Packaging, is examining
the relationship between total engineering support costs reported in the plant records and
machine-hours. These costs have two compon

Target prices, target costs, value engineering, cost incurrence, locked-in costs, activity-based
costing. Cutler Electronics makes a radio-cassette player, CE100, which has 80 components.
Cutler sells units each month for $70 each. The costs of manufacturing CE100 are $45 per unit,
or $315,000 per month. Monthly manufa

The Pacific Corporation operates car rental agencies at more than 20 airports. Customers can
choose from one of three contracts for car rentals of one day or less: Contract 1: $50 for the day
Contract 2: $30 for the day plus $0.20 per mile traveled Contract 3: $1 per mile traveled 1. Plot
separate graphs for each of t

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Quality improvement, theory of constraints. The Wellesley Corporation makes printed cloth in
two departments: Weaving and Printing. Direct material costs are Wellesley’s only variable
costs. The demand for Wellesley’s cloth is very strong. Wellesley can sell whatever output
quantities it produces at $1,250 per roll
Quality improvement, relevant costs, and relevant revenues. The Thomas Corporation sells
300,000 V262 valves to the automobile and truck industry. Thomas has a capacity of 110,000
machine-hours and can produce 3 valves per machine-hour V262’s contribution margin per
unit is $8. Thomas sells only 300,000 valves becaus

Life cycle product costing. Intentical Inc., manufactures game systems. Intentical has decided to
create and market a new system with wireless controls and excellent video graphics.
Intentical’s managers re thinking of calling this system the Yew. Based on past experience
they expect the total life cycle of the Yew t

Relevant-cost approach to short-run pricing decisions. The San Carles Company is an electronics
business with eight product lines. Income data for one of the products (XT-107) for June 2009
are: Abrams, Inc., an instruments company, has a problem with its preferred supplier of XT-107
components. This supplier has had

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Target costs, effect of product-design changes on product costs. Medical Instruments uses a
manufacturing costing system with one direct-cost category (direct materials) and three indirect-
cost categories: a. Setup, production order, and materials-handling costs that vary with the
number of batches b. Manufacturing-o

Target operating income, value-added costs, Service Company. Carasco Associates prepares
architectural drawings to conform to local structural-safety codes. Its income statement for 2009
is: Following is the percentage of time spent by professional staff on various activities: Assume
administrative and support costs

Cost centers, profit centers, decentralization, transfer prices. Fenster Corporation manufactures
windows with wood and metal frames. Fenster has three departments: Glass, Wood, and Metal.
The Glass Department makes the window glass and sends it to either the Wood or Metal
Department where the glass is framed. The wind

Multiple regression. Bebe Williams wonders if she should run a multiple regression with both
number of setups and number of setup hours, as cost drivers. If you want to use Excel to solve
this problem, go to the Excel Lab at www.prenhall.com/hornqren/cost13e and download the
template for Problem 10-38. 1. Run a multip

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Ethics, levers of control. (R. Madison, adapted, Strategic Finance, January 2000). United Forest
Products (UFP) is a large timber and wood processing plant. UFP’s performance-evaluation
system pays its managers substantial bonuses if the company achieves annual budgeted profit
numbers. In the last quarter of 2009, Am
ROI, RI, DuPont method, investment decisions, balanced scorecard. News Mogul Group has two
major divisions: Print and Internet. Summary financial data (in millions) for 2008 and 2009 are
as follows: The two division managers’ annual bonuses are based on division ROI (defined
as operating income divided by total asse

Target rate of return on investment activity-based costing. Electronic Arts (EA) distributes vide
games to retail stores and video-game parlors. It has a simple business model: Order the video
games, catalog the games on EA’s Web site, deliver and provide on-site support, and bill and
collect from the customers. EA r

International transfer pricing, taxes, goal congruence. Argone Division of Gemini Corporation is
located in the United States. Its effective income tax rate is 20%. Another division of Gemini,
Calcia, is located in Canada, where the income tax rate is 38%. Calcia manufactures, among
other things, an intermediate produc

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Learning curve, cumulative average-time learning model. Global Defense manufactures radar
systems. It has just completed the manufacture of its first newly designed system, RS-32.
Manufacturing data for the RS-32 follow: Calculate the total variable costs of producing 2, 4,
and 8units.

Short-run pricing, capacity constraints. Vermont Hills Dairy, maker of specialty cheeses,
produces a soft cheese from the milk of Holstein cows raised on a special corn-based diet. One
kilogram of soft cheese, which has a contribution margin of $8, requires 4 liters of milk. A well-
known gourmet restaurant has asked Ve

ROI, RI, measurement of assets. (CMA, adapted) Carter Corporation recently announced a bonus
plan to be awarded to the manager of the most profitable division. The three division managers
are to choose whether ROI or RI will be used to measure profitability. In addition, they must
decide whether investment will be meas

Relevant-cost approach to pricing decisions, special order. The following financial data apply to
the videotape production plant of the Dill Company for October 2009: Variable manufacturing
overhead varies with the number of units produced. Fixed manufacturing overhead of $1 per tape
is based on budgeted fixed manufac

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Theory of constraints, throughput contribution, quality, relevant costs. Aardee Industries

manufactures pharmaceutical products in two departments: Mixing and Tablet-Making.
Additional information on the two departments follows. Each tablet contains 0.5 gram of direct
materials. The Mixing Department makes 200,000 gra
High-low method and regression analysis. Happy Business College has recently opened a
restaurant as part of its hospitality major. For the first 10 weeks the manager did not estimate any
costs, but instead hoped revenues would cover costs. One of the new waiters, who happens to be
taking a cost accounting class, sugges

Multinational performance measurement ROI, RI. The Grandlund Corporation manufactures

similar products in the United States and Norway. The U.S. and Norwegian operations are
organized as decentralized divisions. The following information is available for 2011; ROI is
calculated as operating income divided by total asse

Regression analysis, Service Company. Bob Jones owns a catering company that prepares food
and beverages for banquets and parties. For a standard party the cost on a per-person basis is:
Jones is quite certain about his estimates of the food, beverages, and labor costs but is not as
comfortable with the overhead esti

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Executive compensation, balanced scorecard. Community Bank recently introduced a new bonus
plan for its business unit executives. The company believes that current profitability and
customer satisfaction levels are equally important to the bank’s long-term success. As a
result, the new plan awards a bonus equal to 1%

Goal incongruence and ROI. BleefI Corporation manufactures furniture in several divisions,
including the Patio Furniture division. The manager of the Patio Furniture division plans to retire
in two years. The manager receives a bonus based on the division’s ROI, which is currently
11%. One of the machines that the Pa

Manufacturing lead times, relevant revenues, and relevant costs. The Brandt Corporation makes
wire harnesses for the aircraft industry. Brandt is uncertain about when and how many customer
orders will be received. The company makes harnesses only after receiving firm orders from its
customers. Brandt has recently purch

Interpreting regression results, matching time periods. Brickman Apparel produces equipment
for the extreme-sports market. It has four peak periods, each lasting two months, for
manufacturing the merchandise suited for spring, summer, fall, and winter. In the off-peak
periods, Brickman schedules equipment maintenance a

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Analysis of return on invested assets, comparison of two divisions, DuPont method. Learning
World, Inc. has two divisions: Test Preparation and Language Arts. Results (in millions) for the
past three years are partially displayed here: 1. Complete the table by filling in the blanks. 2. Use
the DuPont method of profi
Risk sharing, incentives, benchmarking, multiple tasks. The Dexter Division of AMCD sells car
batteries. AMCO’s corporate management gives Dexter management considerable operating
and investment autonomy in running the division. AMCD is considering how it should
compensate Jim Marks, the general manager of the Dexter

Statistical quality control, airline operations. Jetrans Airlines operates daily round-trip flights on
the London—Los Angeles route using a fleet of three 747s: the Spirit of Atlanta, the Spirit of
Boston, and the Spirit of Sacramento. The budgeted quantity of fuel for each round-trip flight is
the 12-month mean (ave

General guideline, transfer pricing. The Shamrock Company manufactures and sells television
sets. Its Assembly Division (AD) buys television screens from the Screen Division (SD) and
assembles the TV sets. The SD, which is operating at capacity, incurs an incremental
manufacturing cost of $80 per screen. The SD can sel

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Relevant-cost approach to pricing decisions. Stardom, Inc., cans peaches for sale to food
distributors. All costs are classified as either manufacturing or marketing. Stardom prepares
monthly budgets. The March 2009 budgeted absorption-costing income statement is as follows:
Monthly costs are classified as fixed or va

Purchasing Department cost drivers, multiple regression analysis Barry Lee decides that the
simple regression analysis used in Problem 10-40 could be extended to a multiple regression
analysis. He finds the following results for two multiple regression analyses: Regression 4: PDC
= a + (b1 × No. of P0’s) + (b2 ×

High-low method, regression analysis. Anna Martinez, the financial manager at the Casa Real
restaurant is checking to see if there is any relationship between newspaper advertising and sales
revenues at the restaurant She obtains the following data for the past 10 months: She estimates
the following regression equati

Cost-plus, target pricing, working backward (S. Sridhar, adapted) Waterbury, Inc., manufactures
and sells RF17, a specialty raft used for whitewater rafting. In 2009, it reported the following: 1.
What was the selling price in 2009? What was the percentage markup on full cost? What was the
variable cost per unit? 2.

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Cost-plus, target return on investment pricing, Vend-o-licious makes candy bars for vending
machines and sells them to vendors in cases of 30 bars. Although Vend-o-licious makes a variety
of candy, the cost differences are insignificant, and the cases all sell for the same price. Vend-o-
licious has a total investment i
Multinational transfer pricing, global tax minimization. Industrial Diamonds, Inc., based in Los
Angeles, has two divisions: South African Mining Division, which mines a rich diamond vein in
South Africa U.S Processing Division, which polishes raw diamonds for use in industrial cutting
tools The Processing Division’

ROI, RI, division manager’s compensation, balanced scorecard. Key information for the
Peoria Division (PD) of Barrington Industries for 2009 follows. PD’s managers are evaluated
and rewarded on the basis of ROI defined as operating income divided by total assets. Barrington
Industries expects its divisions to incr

ROI performance measures based on historical cost and current cost, Nature’s Elixir
Corporation operates three divisions that process and bottle natural fruit juices. The historical-
cost accounting system reports the following information for 2008: Nature’s Elixir estimates
the useful life of each plant to be 12 y

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Compensation linked with profitability, waiting time, and quality measures. Mid-Atlantic
Healthcare operates two medical groups, one in Philadelphia and one in Baltimore. The semi-
annual bonus plan for each medical group’s president has three components: a. Profitability
performance. Add 1% of operating income. b.

Select the graph that matches the numbered manufacturing cost data. Indicate by letter which
graph best fits the situation or item described. The vertical axes of the graphs represent total cost
and the horizontal axes represent units produced during a calendar year. In each case, the zero
point of dollars and produc

Transfer-pricing methods, goal congruence. British Columbia Lumber has a Raw Lumber
Division and a Finished Lumber Division. The variable costs are: Raw Lumber Division: $100
per 100 board-feet of raw lumber Finished Lumber Division: $125 per 100 board-feet of finished
lumber Assume that there is no board-feet loss in

Pricing in imperfect markets (continuation of 22-28). Refer to Problem 22-28. 1. Suppose the
manager of Division A has the option of (a) cutting the external price to $195, with the certainty
that sales will rise to 1,000 units or (b) maintaining the external price of $200 for the 800 units
and transferring the 200 uni

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Theory of constraints, throughput contribution, quality. Refer to the information in Exercise 19-
25 in answering the following requirements. There is no connection between the requirements. 1.
Mayfield produces 2,000 defective units at the machining operation. What is the cost to Mayfield
of the defective items produc
Account analysis method. Lorenzo operates a car wash. Incoming cars are put on an automatic
conveyor belt. Cars are washed as the conveyor belt carries them from the start station to the
finish station. After a car moves off the conveyor belt, it is dried manually. Workers then clean
and vacuum the inside of the car Lo

Transfer-pricing dispute. The Allison-Chambers Corporation, manufacturer of tractors and other

heavy farm equipment, is organized along decentralized product lines, with each manufacturing
division operating as a separate profit center. Each division manager has been delegated full
authority on all decisions involving

Goal-congruence problems with cost-plus transfer-pricing methods, dual-pricing system

(continuation of 22-30). Assume that Pat Borges, CEO of Crango, had mandated a transfer price
equal to 200% of full cost. Now he decides to decentralize some management decisions and
sends around a memo that states: “Effective immed

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Matching graphs with descriptions of cost and revenue behavior. Given here are a number of
graphs. The horizontal axis represents the units produced over the year and the vertical axis
represents total cost or revenues. Indicate by number which graph best fits the situation or item
described. Some graphs may be used

Transfer pricing, utilization of capacity. (J. Patell, adapted) The California Instrument Company
(CIC) consists of the Semiconductor Division and the Process-Control Division, each of which
operates as an independent profit center. The Semiconductor Division employs craftsmen who
produce two different electronic compo

ROI, RI, EVA. Performance Auto Company operates a New Car Division (that sells high
performance sports cars) and a Performance Parts Division (that sells performance improvement
parts for family cars). Some division financial measures for 2008 are as follows: 1. Calculate
return on investment (ROI) for each division

ROI, RI and Multinational Firms. Konekopf Corporation has a division in the United States, and
another in France. The investment in the French assets was made when the exchange rate was
$1.20 per euro. The average exchange rate forth year was $1.30 per euro. The exchange rate at
the end of the fiscal yearwas$1.38 per e

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Theory of constraints, throughput contribution, relevant costs. Colorado Industries manufactures

electronic testing equipment Colorado also installs the equipment at customers’ sites and
ensures that it functions smoothly. Additional information on the Manufacturing and Installation
Departments is as follows (capacit
ROI and RI with manufacturing costs. Superior Motor Company makes electric cars and has
only two products, the Simplegreen and the Superiorgreen. To produce the Simplegreen,
Superior Motor employed assets of $13,500,000 at the beginning of the period, and $13,400,000
of assets at the end of the period. Other costs to m

Cost estimation, incremental unit-time learning model. Assume the same information for the
Nautilus Company as in Problem 10-36 with one exception. This exception is that Nautilus uses
an 85% incremental unit-time learning model as a basis for predicting direct manufacturing
labor–hours in its assembling operations.

The controller of the ljiri Company wants you to estimate a cost function form the following two
observations in a general ledger account called Maintenance. 1. Estimate the cost function for
maintenance. 2. Can the constant in the cost function be used as an estimate of fixed maintenance
cost per month?Explain.

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Terry Lawler, managing director of the Memphis Consulting Group, is examining how overhead
costs behave with changes in monthly professional labor-hours billed to clients. Assume the
following historical data: 1. Compute the linear cost function, relating total overhead costs to
professional labor-hours, using the r

Quality improvement, Pareto diagram, cause-and-effect diagram. The Murray Corporation

manufactures, sells, and installs photocopying machines. Murray has placed heavy emphasis on
reducing defects and failures in its production operations. Murray wants to apply the same total
quality management principles to manage its

Multinational firms, differing risk, comparison of profit, ROI and RI. Zzwuig Multinational, Inc.
has divisions in the United States, Germany, and New Zealand. The U.S. division is the oldest
and most established of the three, and has a cost of capital of6%. The German division was
started three years ago when the exch

The Marino Repair Shop repairs and services machine tools. A summary of its costs (by activity)
for 2009 is as follows: 1. Classify each cost as value-added, non-value-added, or in the gray area
in between. 2. For any cost classified in the gray area, assume 65% is value-added and 35% is
non-value-added. How much of

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Effect of alternative transfer-pricing methods on division operating income. Crango Products is a

cranberry cooperative that operates two divisions: a Harvesting Division and a Processing
Division. Currently, all of Harvesting’s output is converted into cranberry juice by the
Processing Division, and the juice is sol
Transfer pricing, goal congruence. The Orsilo Corporation makes end sells 10,000 multisystem
music players each year Its Assembly Division purchases components from other divisions of
Orsilo or from external suppliers and assembles the multisystem music players. In particular, the
Assembly Division can purchase the CD

Account analysis method. Gower, Inc., a manufacturer of plastic products, reports the following
manufacturing costs and account analysis classification for the year ended December 31, 2009.
Gower, Inc., produced 75,000 units of product in 2009. Gower’s management is estimating
costs for 2010 on the basis of 2009 nu

Waiting times, manufacturing lead times. The SRG Corporation uses an injection molding
machine to make a plastic product, Z39. SRG makes products only after receiving firm orders
from its customers. SRG estimates that it will receive 50 orders for Z39 (each order is for 1,000
units) during the coming year. Each order o