Decision Making Paper 1

What is the opportunity cost of making a component part in a factory given no alternative use of the capacity?

The opportunity cost of making a component part in a factory with no excess capacity is the

Power Systems, Inc., manufactures jet engines for the United States armed forces on a cost-plus basis. The cost of a particular jet engine the company manufactures is shown as follows:

Direct materials	$200,000
Direct labor	150,000
Overhead
Supervisor’s salary	20,000
Fringe benefits on direct labor	15,000
Depreciation	12,000
Rent	11,000
Total cost	$408,000

If production of this engine were discontinued, the production capacity would be idle, and the supervisor would be laid off. When asked to bid on the next contract for this engine, the minimum unit price that Power Systems should bid is

Hermo Company has just completed a hydro-electric plant at a cost of $21,000,000 The plant will provide the company’s power needs for the next 20 years Hermo will use only 60% of the power output annually At this level of capacity Hermo’s annual operating costs will amount to $1,800,000, of which 80% are fixed. Quigley Company currently purchases its power from MP Electric at an annual cost of $1,200,000. Hermo could supply this power, thus increasing output of the plant to 90% of capacity. This would reduce the estimated life of the plant to 14 years. If Hermo decides to supply power to Quigley, it wants to be compensated for the decrease in the life of the plant and the appropriate variable costs. Hermo has decided that the charge for the decreased life should be based on the original cost of the plant calculated on a straight-line basis. The minimum annual amount that Hermo would charge Quigley would be

Hermo Company has just completed a hydro-electric plant at a cost of $21,000,000 The plant will provide the company’s power needs for the next 20 years Hermo will use only 60% of the power output annually At this level of capacity Hermo’s annual operating costs will amount to $1,800,000, of which 80% are fixed. Quigley Company currently purchases its power from MP Electric at an annual cost of $1,200,000. Hermo could supply this power, thus increasing output of the plant to 90% of capacity. This would reduce the estimated life of the plant to 14 years. The maximum amount Quigley would be willing to pay Hermo annually for the power is

JJ Motors, Inc., employs 45 sales personnel to market its line of luxury automobiles. The average car sells for $23,000, and a 6% commission is paid to the salesperson. JJ Motors is considering a change to a commission arrangement that would pay each salesperson a salary of $2,000 per month plus a commission of 2% of the sales made by that salesperson. The amount of total monthly car sales at which JJ Motors would be indifferent as to which plan to select is

A company wants to open a new store in one of two nearby shopping malls. In Mall A, the rent will be $250,000 per year. In Mall B, the rent will be 4% of gross revenues. Assuming that revenues and all other elements under consideration are the same for both malls, at what level of revenues will the company be indifferent between the two malls?

A company wants to open a new store in one of three nearby shopping malls. In Mall A, the rent will be $300,000 per year. In Mall B, the rent will be 4% of gross revenues. In Mall C, the rent will be $150,000 per year plus 3% of gross revenues. Assume that revenues and all other elements under consideration are the same for all three malls. Which mall should the company choose if revenues are expected to be $6,000,000 per year?

A company wants to open a new store in one of three nearby shopping malls. In Mall A, the rent will be $300,000 per year. In Mall B, the rent will be 4% of gross revenues. In Mall C, the rent will be $150,000 per year plus 3% of gross revenues. Assume that revenues and all other elements under consideration are the same for all three malls. If the company expects revenues to be $10,000,000 per year, which mall should be chosen?

A company wants to open a new store in one of three nearby shopping malls. In Mall A, the rent will be $300,000 per year. In Mall B, the rent will be 4% of gross revenues. In Mall C, the rent will be $150,000 per year plus 3% of gross revenues. Assume that revenues and all other elements under consideration are the same for all three malls. What is the maximum level of revenues at which Mall C will be the most desirable of the three options?