# wk3 hw prblems.docx _240K_ - Student of Fortune

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```					              High-low method; regression analysis. (CIMA, adapted) 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 equation:

Monthly revenues = \$39,502 + (\$8.723 × Advertising costs)

1.       Plot the relationship between advertising costs and revenues.

2.        Draw the regression line and evaluate it using the criteria of economic
plausibility, goodness of fit, and slope of the regression line.

3.       Use the high-low method to compute the function, relating advertising
costs and revenues.

4.        Using (a) the regression equation and (b) the high-low equation, what is
the increase in revenues for each \$1,000 spent on advertising within the relevant
range? Which method should Martinez use to predict the effect of advertising costs
on revenues? Explain briefly.
(Horngren 379-380)
Horngren, Charles T., George Foster, Srikant M. Datar, Madhav Rajan and Chris Ittner. Cost
Accounting, 13th Edition. Pearson Learning Solutions. <vbk:9781256083375#outline(14.16.3)>.

11-29         Special Order. Louisville Corporation produces baseball bats for kids that
it sells for \$32 each. At capacity, the company can produce 50,000 bats a year. The
costs of producing and selling 50,000 bats are as follows:

Required

1.        Suppose Louisville is currently producing and selling 40,000 bats. At this
level of production and sales, its fixed costs are the same as given in the table
above. Ripkin Corporation wants to place a one-time special order for 10,000 bats
at \$25 each. Louisville will incur no variable selling costs for this special order.
Should Louisville accept this one-time special order? Show your calculations.

2.       Now suppose Louisville is currently producing and selling 50,000 bats. If
Louisville accepts Ripkin’s offer it will have to sell 10,000 fewer bats to its regular
customers. (a) On financial considerations alone, should Louisville accept this one-
time special order? Show your calculations. (b) On financial considerations alone,
at what price would Louisville be indifferent between accepting the special order
and continuing to sell to its regular customers at \$32 per bat. (c) What other factors
should Louisville consider in deciding whether to accept the one-time special order?
(Horngren 419-420)
Horngren, Charles T., George Foster, Srikant M. Datar, Madhav Rajan and Chris Ittner. Cost
Accounting, 13th Edition. Pearson Learning Solutions. <vbk:9781256083375#outline(15.15.3)>.

19-35      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 grams of direct materials mixture (enough to
make 400,000 tablets) because the Tablet-Making Department has only enough
capacity to process 400,000 tablets. All direct material costs are incurred in the
Mixing Department. Aardee incurs \$156,000 in direct material costs. The Tablet-
Making Department manufactures only 390,000 tablets from the 200,000 grams of
mixture processed; 2.5% of the direct materials mixture is lost in the tablet-making
process. Each tablet sells for \$1. All costs other than direct material costs are fixed
costs. The following requirements refer only to the preceding data. There is no
connection between the requirements.

Required

1.        An outside contractor makes the following offer: If Aardee will supply the
contractor with 10,000 grams of mixture, the contractor will manufacture 19,500
tablets for Aardee (allowing for the normal 2.5% loss of the mixture during the
tablet-making process) at \$0.12 per tablet. Should Aardee accept the contractor’s
2.       Another company offers to prepare 20,000 grams of mixture a month from
direct materials Aardee supplies. The company will charge \$0.07 per gram of
mixture. Should Aardee accept the company’s offer? Show your calculations.

3.       Aardee’s engineers have devised a method that would improve quality in
the Tablet-Making Department. They estimate that the 10,000 tablets currently
being lost would be saved. The modification would cost \$7,000 a month. Should
Aardee implement the new method? Show your calculations.

4.       Suppose that Aardee also loses 10,000 grams of mixture in its Mixing
Department. These losses can be reduced to zero if the company is willing to spend
\$9,000 per month in quality-improvement methods. Should Aardee adopt the

5.        What are the benefits of improving quality in the Mixing Department
compared with improving quality in the Tablet-Making Department?
(Horngren 695)
Horngren, Charles T., George Foster, Srikant M. Datar, Madhav Rajan and Chris Ittner. Cost
Accounting, 13th Edition. Pearson Learning Solutions. <vbk:9781256083375#outline(23.18.3)>.

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