f01 justanswer

							Decision Making and Ethics [LO 1, Ethics]

Joan Paxton, VP of marketing for Supertone Recording Equipment, has developed a marketing
plan for presentation to the company's president. The plan calls for television ads, something the
company has never used. As part of her presentation, she will indicate the impact of the TV ads
on company profit as follows:

        Incremental sales from increased exposure                                  $9,123,000
        Less:
           Incremental cost of goods sold                     $3,649,200
           Cost of TV ads                                      2,543,000            6,192,200
        Incremental profit                                                         $2,930,800

While Joan is quite confident in the cost of the ads and the incremental cost of goods sold if sales
are $9,123,000, she is quite uncertain about the sales increase. In fact, she believes that her
estimate is on the high side. However, she also believes that if she puts in a more conservative
estimate, such as $7,073,000, the president will not go along with the TV ads even though they
still will generate substantial profits at $7,073,000 of incremental sales.

Is it unethical of Joan to bias her estimate of incremental sales on the high side, given that she
believes the ultimate outcome is in the best interest of the company?


 AP7-2 (a,b)

 Incremental Analysis of Outsourcing Decision [LO 1, 2, 4]

 Oakland College is considering outsourcing grounds maintenance. In this regard, Oakland
 has received a bid from Highline Grounds Maintenance for $312,740 per year. Highline
 states that its bid will cover all services and planting materials required to "keep Oakland's
 grounds in a condition comparable to prior years." Oakland's cost for grounds maintenance
 in the preceding year were $319,870 as follows:

          Salary of three full-time gardeners            $203,160
          Plant materials                                  85,080
          Fertilizer                                        7,990
          Fuel                                              9,650
          Depreciation of tractor, mowers, and other
             miscellaneous equipment                       13,990
          Total                                          $319,870

 If Oakland College outsources maintenance, it will be able to sell equipment for $34,260,
 and the three gardeners will be laid off.
Analyze the one-year financial impact of outsourcing grounds maintenance.

$




                                                                       How will
                                                                       savings in the
                                                                       second year
                                                                       differ from
                                                                       those in year 1?

                                                                       $
P7-5

Keep-or-Buy Decision, Sunk Costs [LO 1, 2, 4]

Susan Crossing purchased a used Ford Focus for $8,000. Since purchasing the car, she has
spent the following amounts on parts and labor:

        New stereo system                $1,500
        New paint job                     2,500
        New tires                           900
        New muffler                         250
        Total                            $5,150

Unfortunately, the car needs a few major repairs now; among other things, the brake rotors
and pads must be replaced, and the radiator has sprung a leak. (A new radiator is needed.)
The repairs are estimated to cost $2,500.

Susan has looked around at other used cars and has found a used Honda Civic for $8,500
that is in very good condition and is approximately the same age as the Ford Focus. Susan
can sell the Ford Focus "as is" for $6,500.



 In trying to decide whether to repair the Ford Focus or buy the Honda Civic, Susan is upset
 because she has already spent $13,150 on the Focus. The car seems like it costs too much
 to sell at such a large loss. How would you react to her dilemma?
Assuming that Susan would be equally happy with either the Ford Focus or the Honda
Civic, should she buy the Civic or repair the Focus? Explain your answer.




Are there any qualitative factors that might enter into this decision? Explain.
AP7-9 (a)



Dropping a Product Line [LO 1, 2, 4]

Pantheon Gaming, a computer enhancement company, has three product lines: audio enhancers,
video enhancers, and connection-speed accelerators. Common costs are allocated based on
relative sales. A product line income statement follows:

                                          Pantheon Gaming
                                          Income Statement
                                For the Year Ended December 31, 2011
                                         Audio         Video   Accelerators                Total
        Sales                         $1,045,000   $2,255,000    $2,200,000            $5,500,000
        Less cost of goods sold          575,000    1,240,000     1,870,000             3,685,000
        Gross margin                     470,000    1,015,000       330,000             1,815,000
        Less other variable costs         57,600       72,000        24,600               154,200
        Contribution margin              412,400      943,000       305,400             1,660,800
        Less direct salaries             155,700      178,200        70,000               403,900
        Less common fixed costs:
          Rent                            11,970       25,830        25,200                63,000
          Utilities                        4,370        9,430         9,200                23,000
          Depreciation                     5,890       12,710        12,400                31,000
          Other administrative
                                          79,230      170,970       166,800               417,000
          costs
        Net income                      $155,240     $545,860       $21,800              $722,900

Since the profit for accelerator devices is relatively low, the company is considering dropping
this product line.

Determine the impact on profit of dropping accelerator products.

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AP7-17 (a)

(Appendix) Batch Size Decision and Constraints [LO A1]

At Dalton Playground Equipment, the powder-coating process is a bottleneck. Typically, it takes
approximately two hours to switch between jobs. The time is spent cleaning nozzles and paint
tanks and recalibrating equipment. Currently the company runs relatively small batch sizes
through the process but is considering increasing them to reduce setup time.
       With small batch sizes, powder coating can process approximately 2,400 units per 8-hour
shift, and products have an average contribution margin of $55. With large batch sizes, powder
coating can process approximately 2,990 units per 8-hour shift.

Calculate the additional profit associated with running larger batch sizes through the powder-
coating process.

$