A firm produces two joint products (A and B) from one unit of raw material, which costs $1,000. Product A can be sold for $700 and product B can be sold for $500 at the split-off point. Alternatively, both A and/or B can be processed further and sold for $900 and $1,200, respectively. The additional processing costs are $100 for A and $750 for B. Should the firm process products A and B beyond the split-off point?
Answer (C) is correct. The incremental costs ($100) for A are less than the incremental revenue ($200). However, the incremental costs of B ($750) exceed the incremental revenue ($700). Consequently, the firm should process A further and sell B at the split-off point.
A company has 7,000 obsolete toys carried in inventory at a manufacturing cost of $6 per unit. If the toys are reworked for $2 per unit, they could be sold for $3 per unit. If the toys are scrapped, they could be sold for $1.85 per unit. Which alternative is more desirable (rework or scrap), and what is the total dollar amount of the advantage of that alternative?
Answer (A) is correct. The original manufacturing cost of $6 per unit is a sunk cost that is not relevant to this decision. The relevant costs are the amounts that must be expended now. Hence, selling the toys for scrap has a $5,950 advantage because rework will produce an additional $7,000 [7,000 × ($3 – $2)], whereas the alternative generates an additional $12,950 (7,000 × $1.85).
Grapevine Corporation produces two joint products, JP-1 and JP-2, and a single by-product, BP-1, in Department 2 of its manufacturing plant. JP-1 is subsequently transferred to Department 3, where it is refined into a more expensive, higher-priced product, JP-1R, and a by-product known as BP-2. Recently, Santa Fe Company introduced a product that would compete directly with JP-1R, and as a result, Grapevine must re-evaluate its decision to
process JP-1 further. The market for JP-1 will not be affected by Santa Fe’s product and Grapevine plans to continue production of JP-1, even if further processing is terminated. Should this latter action be necessary, Department 3 will be dismantled. Which of the following items should Grapevine consider in its decision to continue or terminate Department 3 operations?
1. The selling price per pound of JP-1
2. The total hourly direct labor cost in Department3
3. Unit marketing and packaging costs for BP-2
4. Supervisory salaries of Department 3 personnel who will be transferred elsewhere in the plant, if processing is terminated.
5. Department 2 joint cost allocated to JP-1 and transferred to Department 3.
6. The cost of existing JP-1R inventory.
Answer (B) is correct. If further processing is ended, the selling price of JP-1 will be relevant instead of the price of JP-1R. The cost of direct labor in Department 3 is relevant because it will be saved if further processing is ended. Marketing and packaging costs for BP-2 are relevant because they will be saved if Department 3 is closed.
Buchanan Corporation manufactures two products in a joint process incurring $150,000 of joint costs per batch that are allocated using the physical-measure method. Each batch yields 1,000 units of Product A and 4,000 units of Product B. Separable costs are $20,000 for Product A and $20,000 for Product B. Both products sell for $50 per unit. Buchanan has the option of processing Product B further to produce 4,000 units of Product C, incurring additional costs of $8,000. Buchanan should produce Product C if the selling price per unit is greater than
Answer (B) is correct. The unit price of Product B is known to be $50.00. The additional unit cost of further processing is $2.00 ($8,000 ÷ 4,000 units). Consequently, the unit price must be at least $52.00 ($50.00 opportunity cost + $2.00).
Conway Corporation manufactures two products that are considered joint products. Common costs of $350,000, allocated using the physical measures method, yield 15,000 units of Product A and 20,000 units of Product B. Product B incurs $50,000 of direct costs and sells for $15 per unit. Conway has the option of processing Product B further. This action would increase the product’s direct costs by $35,000 and would increase the unit selling price to $17. If Conway further processes Product B, its income will
Answer (B) is correct. The further processing will increase revenue by $2 per unit ($17 – $15). Therefore, total increased revenues are $40,000 ($2 per unit × 20,000 units). Since this exceeds $35000 the costs of further processing by $5000 Conway’s income will increase by $5,000.
If the coefficient of elasticity is zero, then the consumer demand for the product is said to be
Answer (A) is correct. When the coefficient of elasticity (percentage change in demand/change in price) is less than one, demand is inelastic. When the coefficient is zero, the demand is perfectly inelastic.
Last week, the quantity of apples demanded fell by 6%. If this was a result of a 10% price increase, what is the price elasticity of demand for apples?
Answer (D) is correct. The price elasticity of demand is calculated by dividing the percentage change in quantity demanded by the percentage change in price. Thus, the change in quantity of 6% divided by the 10% price increase produces an elasticity of 0.6.
The amount of boysenberries demanded for the third quarter rose from 1,250 units to 1,750 units from last year. This was due to a decrease in price from $1.25 to $0.75 per unit. Therefore, the price elasticity of boysenberries is
Answer (D) is correct.
The price elasticity is calculated by dividing the percentage change in quantity by the percentage change in price. The numerator and denominator are computed as the change over the midpoint range. Thus, the change in quantity of 500 units (1,750 – 1,250) divided by the range of 3,000 (1,750 + 1,250) produces a quantity increase of 1/6. The $.50 price decline divided by the price range of $2 produces a price decline of 25%. Dividing the quantity increase by the price change (1/6 ÷ .25) equals a price elasticity of 2/3
Suppose the price of mood rings rises from $3 to $4 when the quantity demanded of mood rings decreases from 1,000 to 900. What would be the price elasticity of demand coefficient?
Answer (C) is correct. The price elasticity is calculated by dividing the percentage change in quantity demanded by the percentage change in price. The numerator and denominator are both computed as the change over the range. Thus, the change in quantity demanded of 100 units divided by the sum of quantities demanded of 1,900 produces a quantity decrease of 5.263%. The price increase of $1 divided by the sum of the prices of $7 results in a price increase of 14.286%. Dividing 5.263% by 14.286% results in an elasticity coefficient of .3684, or .37 rounded.
In the pharmaceutical industry where a diabetic must have insulin no matter what the cost and where there is no substitute the diabetic’s demand curve is best described as
Answer (B) is correct. When buyers have such a high need for a given product that they must pay whatever price sellers choose to charge and there are no suitable substitutes, demand is said to be perfectly inelastic. This is depicted graphically as a vertical line.