8 Feb 2019

Alternatives and Costs

In the fall, Jay Thompson decided to live in a university dormitory. He signed a dorm contract under which he was obligated to pay the room rent for the full college year. One clause stated that if he moved out during the year, he could sell his dorm contract to another student who would move into the dormitory as his replacement. The dorm cost was $5,000 for the two semesters, which Jay had already paid.

A month after he moved into the dorm, he decided he would prefer to live in an apartment. That week, after some searching for a replacement to fulfill his dorm contract, Jay had two offers. One student offered to move in immediately and to pay Jay $300 per month for the eight remaining months of the school year. A second student offered to move in the second semester and pay $2,500 to Jay.

Jay estimates his food cost per month is $500 if he lives in the dorm and $450 if he lives in an apartment with three other students. His share of the apartment rent and utilities will be $400 per month. Assume each semester is 4.5 months long. Disregard the small differences in the timing of the disbursements or receipts.

(a) What are the three alternatives available to Jay?

(b) Evaluate the cost for each of the alternatives.

(c) What do you recommend that Jay do?

From Chapter 2

Fixed, Variable, Average, and Marginal Costs

One of your firm’s suppliers discounts prices for larger quantities. The first 1,000 parts are $13 each. The next 2,000 are $12 each. All parts in excess of 3,000 are $11 each. What are the average cost and marginal cost per part for the following quantities?

(a) 500

(b) 1,500

(c) 2,500

(d) 3,500

Fixed, Variable, Average, and Marginal Costs

A new machine comes with 100 free service hours over the first year. Additional time costs $75 per hour. What are the average and marginal costs per hour for the following quantities?

(a) 75

(b) 125

(c) 250

Segmenting Models

SungSam Inc. is designing a new digital camcorder that is projected to have the following per unit costs to manufacture:

Cost Categories Unit Costs

Materials costs $63

Labor costs 24

Overhead costs 110


Total unit cost $197

Sungsam adds 30% to its manufacturing cost for corporate profit.

(a) What unit profit would Sungsam realize on each camcorder?

(b) What is the overall cost to produce a batch of 10,000 camcorders?

(c) What would Sungsam’s profit be on the batch of 10,000 if historical data show that 1% of product will be scrapped in manufacturing, 3% of finished products will go unsold, and 2% of sold product will be returned for refund?

(d) How much can Sungsam afford to pay for a contract that would lock in a 50% reduction in the unit material cost previously given? If Sungsam does sign the contract, the sales price will not change.

Cash Flow Diagrams

Pine Village needs some additional recreation fields. Construction will cost $225,000 and annual O&M expenses are $85,000. The city council estimates that the value of added youth leagues is about $190,000 annually. In year 6 another $75,000 will be needed to refurbish the fields. The salvage value is estimated to be $100,000 after 10 years. Draw the cash flow diagram.

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Sixta Kovacek
Sixta KovacekLv2
9 Feb 2019

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