COMMERCE 2AB3 Lecture Notes - Lecture 11: Fixed Cost, Bookkeeping, Opportunity Cost
CHAPTER 11: IN-CLASS NOTES
RELEVANT DATA (COSTS AND BENEFITS FOR DECISION-MAKING
1. Shutting Down A Line – Supermarket
2. Replacing an Asset – Cellphone, Equipment
3. Optimization of Product Mix – Small, Med., Large, Algorithm
4. Make/Buy
5. Special Order
6. Pricing (Not testable on Midterm)
2 Aspects of Making a Decision:
Money (Quantitative) and Qualitative
Special Order
- reputation
- sponsorship
Make Or Buy (Outsourcing)
-break into market you’re outsourcing to
NEED TO USE BOTH QUAN. AND QUAL. IN THE CASE
Opportunity Cost
Ex. You have 2 options:
1) Go to Uni: pay $10K per year for 4 years.
a. $40,000 total
2) Don’t go to Uni: work at McDonalds (min. wage), $11.25/hr.
a. You make $22,000/year (40hrs a week)
3) Stay unemployed: people who pay taxes fund your unemployment so you
get $1,500/month = $18,000 year.
$128,00 is the cost of going to university:
o$40,000 that you would be paying, the $88,000 you’re missing out
on making from the second best option = $128,000.
$88,000 is the opportunity cost of going to Uni. (second best option)
EXAMPLE:
You purchased an IPhone on Jan. 1, 2016 for $700 on a 2 year contract with a
monthly service fee of $80/month. The contract cancellation fee is $300.
After two years, you can sell it for $500, but right now you can sell it for $800.
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On Jan. 2, 2016 you consider buying an Android for $500. Monthly service fee is
$50/month and after two years can sell for $300.
What is the cost over a 2 year period, if you decide to buy an Android?
Yes, buy Android:
Purchase Cost of Android = $500
Less: Sell iPhone Now = (800) - current salvage value of old equipment
Add: Opp. Cost of Lost
Terminal Salvage Value
Of IPhone 500 - you’re not getting the amount you could
have
gotten
Less: Savings in annual
operating costs
(80-50=30)x12mx2yrs = (720)
Add: Contract cancellation
Fee 300
Less: Terminal Salvage
Value of New Equipment (300)
$520 savings
Total Analysis:
What if I keep IPhone:
700 Purchase
80/month
(500) at end
What If I buy Android
700 IPhone
-300 cancellation
Compare the 2 answers, $520 should be the difference.
Feb.3, 2016
EXAMPLE 10:
The following information is related to A&P Supermarket:
Pharmacy Bakery Grocery Total
Sales Rev. 100,000 50,000 400,000 550,000
Variable Costs 60,000 20,000 200,000 280,000
Fixed Costs 90,000 10,000 100,000 200,000
Operating
Income
(50,000) 20,000 100,000 70,000
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Chapter 11: in-class notes: shutting down a line supermarket, replacing an asset cellphone, equipment, optimization of product mix small, med. , large, algorithm, make/buy, special order, pricing (not testable on midterm) Make or buy (outsourcing) break into market you"re outsourcing to. ,00 is the cost of going to university: ,000 that you would be paying, the ,000 you"re missing out on making from the second best option = ,000. ,000 is the opportunity cost of going to uni. (second best option) You purchased an iphone on jan. 1, 2016 for on a 2 year contract with a monthly service fee of /month. After two years, you can sell it for , but right now you can sell it for . On jan. 2, 2016 you consider buying an android for . /month and after two years can sell for . Less: sell iphone now = (800) - current salvage value of old equipment.