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Chapter 6 in Class Work

This document contains 3 summaries of case studies: 1) A comparison of the financial effects of selling a home versus holding onto it, finding an annual advantage of $5,700 to selling. 2) An analysis of whether a company should make or buy bottles, concluding they should make them to save $0.020 per bottle. 3) A consideration of different options for a company's unused facilities, determining they should buy bottles and use facilities for other activities to maximize profits.

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96 views3 pages

Chapter 6 in Class Work

This document contains 3 summaries of case studies: 1) A comparison of the financial effects of selling a home versus holding onto it, finding an annual advantage of $5,700 to selling. 2) An analysis of whether a company should make or buy bottles, concluding they should make them to save $0.020 per bottle. 3) A consideration of different options for a company's unused facilities, determining they should buy bottles and use facilities for other activities to maximize profits.

Uploaded by

Me
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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In Class Chapter 6

6-29 (10-15 min.)

Alternatives Under Consideration


(1) (2) (1) - (2)
Sell, Rent, and Hold
Invest in Bonds Present Home Difference

Revenue $14,700* $ - $14,700


Less: Outlay cost 18,000 9,000** 9,000
Income effects per year $ (3,300) $(9,000) $ 5,700
*3% × $490,000
** $750 × 12

Advantage of selling the home is $9,000 – 3,300 = $5,700. Obviously, if rent is higher, the
advantage decreases.

The above analysis does not contain explicit opportunity costs. If opportunity costs were a part
of the analysis, the following presentation applies (whereby the interest on investment in bonds is not
listed as a separate alternative but is regarded as a forgone alternative):

Alternative Chosen:
Hold Present Home
Opportunity cost $(14,700)
Outlay cost 9,000
Income effects per year $ (5,700)

As before, the advantage of selling the home and renting is $5,700. The opportunity cost of
home ownership is 3% × 490,000 = $14,700.
6-33 (20-25 min.)

Nantucket Nectars should make the bottles.

Make Buy
Per Per
Total Bottle Total Bottle
Purchase cost $250,000$.250
Direct materials $80,000$.080
Direct labor 30,000.030
Variable overhead 60,000.060
Avoidable fixed
overhead 60,000 .060
Total relevant costs $230,000$.230 $250,000$.250
Difference in favor of making $ 20,000$.020

6-34 (15-20 min.)

Buy and
Use
Buy and Facilities Buy and
Leave for Rent
Facilities Other Out
Make Idle Activities Facilities
Contribution from other
activities $ 75
Rent revenue $ 55
Relevant cost of bottles $(230) $(250) (250) (250)
Net relevant costs $(230) $(250) $(175) $(195)

To maximize profits, Nantucket Nectars should buy the bottles and use the facilities for other activities.
6-44 (10-15 min.)

The purpose of this problem is to sharpen the student's concept of "opportunity cost." Daily fees are $225
× 7 hours, or $1,575.

1. The difference in annual income is $434,700 - $398,475 = $36,225:


(a) (b)
Work Don't Work
Work, $1,575 × 6 days × 46 weeks $434,700
Don't work on every other Saturday:
$1,575 × 5 days × 23 weeks $181,125
$1,575 × 6 days × 23 weeks 217,350
Totals $434,700 $398,475

2. The calculation in (1) seems awkward and unnecessary. The opportunity cost is the maximum
amount forgone by not working on every other Saturday, which is $1,575 × 1 day × 23 weeks, or
$36,225. This is really the key number because it answers the crucial question, "What difference
does it make?" Opportunity cost is defined as the maximum available contribution to profit
forgone by using limited resources for a particular purpose.

3. If she has already decided to take the day off, her opportunity cost is zero because in any case
she would not see patients. Note that opportunity cost is a "situation-specific" concept. If one of
the possible alternatives is not even allowed into the feasible set by the decision maker, its
financial effects are irrelevant. On the other hand, if she decided to repair her car instead of
keeping the appointments with patients on a working Saturday, her opportunity cost for the day
would be $1,575; for half a day, $787.50.

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