...RELEVANT COST CASES: Problem 1: Judson Company Judson Company makes widgets and wangles, both of which use a polishing machine as part of production. The widgets and wangles have the following price and cost characteristics: | |Widgets |Wangles | |Annual Capacity |1,000 units |2,000 units | |Price per unit |$50 |$100 | |Variable Cost per unit |$20 |$50 | |Annual fixed costs |$10,000 |$10,000 | |Polishing machine hours per unit |1 hour |2 hours | The polishing machine can operate for a total of 3,000 hours during the year. a. What product mix creates the most profit for Judson Company, given all the constraints? b. If there were only machine hour constraints what product mix would create the greatest profit mix for Judson? Problem 2:News.com News.com is a Web site that offers users access to current national and international news stories. News.com doesn’t charge users...
Words: 2952 - Pages: 12
...The Role and Measurement of Quality in Competition Analysis 2013 The OECD Competition Committee discussed the role and measurement of quality in competition analysis in June 2013. This document contains an executive summary of that debate and the documents from the meeting: an analytical note by the OECD staff and written submissions: Australia, Canada, Chile, the European Union, Indonesia, Japan, Mexico, Portugal, United Kingdom, Ukraine, United States and BIAC. A note by Theodore Voorhees Jr. as well as a detailed summary of the discussion are also included. Competition policy is just as concerned with quality as it is with prices. While the importance of quality is undisputed and issues about quality are mentioned pervasively in competition agency guidelines and court decisions, there is no widely-agreed framework for analysing it which often renders its treatment superficial. There are a number of reasons why in practice, courts and competition authorities rarely analyse quality effects as rigorously as they analyse price effects. First, quality is a subjective concept and therefore much harder to define and measure than prices. In addition, microeconomic theory offers little help in predicting how changes in the level of competition in a market will affect quality and it is usually up to empirical analysis to determine how quality will change in response to varying degrees of competition in the context of particular markets. Given difficulties in terms of the evaluation...
Words: 125933 - Pages: 504
...Institutions - Courts, FTC, DOJ, Congress. Information - Asymmetric (FTC has done a lot of research and know quiet a lot to support the antitrust case but Staples and Office depot will know more about the relevant product market, Pricing etc.), Incomplete (e.g. Whether it was possible to pass through the improvements in efficiencies to the consumers and if yes how much), Contested (Whether the definition of the relevant product market was right, etc.). Nonmarket issue lifecycle analysis - The issue was in the legislative stage. FTC had contested the merger of Staples and Office Depot on the basis of antitrust concerns and now the courts have issued a preliminary injunction. But instead of continuing with the trial the companies have decided to terminate the merger. Hence it can be said that issue is in the enforcement stage of the issue life cycle. Brief answers to the end of case questions - 1) What was the key finding by the court that effectively decided the case for a preliminary injunction? While making a decision the court required the FTC to show that its challenge was likely to succeed and in balancing the equities it was of greater harm to let the transaction proceed than to reverse it later. The key finding by the court was the definition of the relevant product market as “office supply superstores”. FTC supported its claims by using the pricing differences in one firm market as compared to two and three firms market and also by demonstrating that the price...
Words: 1538 - Pages: 7
...Proposed Merger Between Staples and Office Depot Leads to Concerns of Higher Prices Michael Baye and Patrick Scholten prepared this case to serve as the basis for classroom discussion rather than to represent economic or legal fact. The case is a condensed and slightly modified version of the public copy of the FTC's motion for a temporary restraining order and preliminary injunction against the proposed merger between Staples and Office Depot dated April 10, 1997. No 1:97CV00701. OFFICE SUPPLY SUPERSTORE MARKET Staples and Office Depot pioneered the office superstore concept within months of each other in 1986. Over the next ten years, they and a number of other firms seized on the same strategy of providing a convenient, reliable and economical source of office supplies for small businesses and individuals with home offices. These firms competed aggressively, developing office superstores as a one-step destination, carrying a full line of consumable office supply items as well as assorted other products. Staples and Office Depot have been immensely successful: today, Staples has almost 500 stores and Office Depot has more than 500 stores nationwide; they compete head-to-head in 42 metropolitan areas across the country. On September 4, 1996, Staples and Office Depot entered into an agreement whereby Staples would acquire the stock and assets of Office Depot for $4 billion. The merged company would have combined annual sales that exceed $10 billion. Absent the merger, both...
Words: 7162 - Pages: 29
...has evolved over the last few decades. Our examples focus on the US experience, which we know best. But we are confident that the broad considerations we discuss apply to any competition policy regime. The first body of economic knowledge we discuss involves methods of distinguishing among alternative explanations for market outcomes or firm conduct. This is termed the problem of ‘‘identification’’ in empirical economics.We show how courts can apply what economists have learned about identification to the problems of defining markets and determining whether market power has been exercised. We show that the same analytic issues arise regardless of whether the evidence on these concepts is quantitative or qualitative. The second relevant body of economic knowledge derives from the empirical economics research literature, taken as a whole. That literature demonstrates that di¤erences among industries are important, making the industry the appropriate unit of analysis for addressing economic issues related to competition policy. A similar conclusion was reached long ago in antitrust law, when market definition became central to reasonableness analysis. But, as we explain, the research literature goes further in a way that has not yet been fully appreciated in antitrust: it suggests generalizations across closely related industries that can be exploited to help evaluate evidence and resolve cases. We conclude by considering ways of increasing the institutional capacity...
Words: 326 - Pages: 2
...TRUE/FALSE 1. Sunk costs are usually relevant costs for decision making. a. True b. False 2. An example of a sunk cost is the amount of a guaranteed contract that has not yet been paid. a b. False 3. Personal employee responses are not critical considerations for the business decision maker. a. True b. False 4. For decision-making, differential costs assist in choosing between alternatives. a. True b. False 5. For a particular decision, differential revenues and costs are always relevant. a. True b. False 6. A cost may be relevant for one decision, but not relevant for a different decision. a. True b. False 7. Avoidable costs are eliminated when a product is outsourced. a. True b. False 8. In make-or-buy decisions, the suppliers’ reputation for quality and service is not a relevant quantitative factor. a. True b. False 9. For one-time-only special orders, variable costs may be relevant but not fixed costs. a. True b. False 10. Bid prices and costs that are relevant for regular orders are the same costs that are relevant for one-time-only special orders. a. True b. False 11. When opportunity costs exist, they are always relevant. a. True b. False 12. Depreciation expenses allocated to a product line is a relevant cost when deciding to discontinue that product. a. True b. False 13. When replacing an old machine with a new machine, the book value of the old machine is a relevant cost. a. True b....
Words: 7977 - Pages: 32
...Incremental analysis, also known as marginal or differential analysis, is one of the methods used by managers in decision making. It involves choosing between alternatives based on revenue differences, cost differences and cost saving differences. While undertaking incremental analysis, the three different costs to be considered are sunk costs, relevant costs and opportunity costs. Sunk costs are those which are not relevant for decision making. They are incurred indifferent to the alternative course of action. Relevant costs are those which need to be considered for decision making. They vary between the alternatives. Opportunity costs is the cost of choosing one alternative over the other. There are three different types of incremental analysis – present worth analysis, cash flow analysis and rate of return analysis. Cash flow analysis: · First step is to identify the incremental after tax cash flows for all alternatives. · When determining the above, only relevant costs are to be taken · Consider the cost of opportunity of not choosing the other alternative · Overhead costs which are fixed should not be allocated · Changes in net working capital (Current Assets – Current Liabilities) should be included · Depreciation is a non cash expense. However, the tax effect of the same should be considered if tax rates are applicable · Second step is to discount the cash flows using an appropriate discounting rate...
Words: 345 - Pages: 2
...from SAF Sdn Bhd on 23 October 2010 and incurred expenditure as follows: | RM ‘000 | Purchase price (including land cost RM450,000) | 2,500 | Stamp duties | 50 | Legal fees | 15 | Total | 2,565 | The SAF Sdn Bhd had used the factory for the purpose of its business up to 15 September 2010. The residual expenditure as at 31 December 2009 was RM1,020,500. The factory was constructed in 2009 at a cost of RM1,500,000. It was brought into use in November 2009 and capital allowances were claimed for each year. AAN Sdn Bhd used the building as a factory immediately after purchased. On 23 October 2013 AAN Sdn Bhd transferred the factory to its wholly owned subsidiary, ASM Sdn Bhd (financial year-end 30 June) for RM1,200,000 (excluding land cost). The market value at the time of transfer has been RM1,500,000 for the building and RM500,000 for the land. ASM Sdn Bhd engaged in the business of hiring storage space to the public and the building was used as a warehouse for the purposes of its business. REQUIRED: i- Compute the qualifying building expenditure and industrial building allowances of AAN Sdn Bhd for the relevant years of assessment (Show all relevant computations). ii- Determine the qualifying building expenditure and the industrial building allowance(s) of ASM Sdn Bhd for year of assessment 2014 (Show all relevant computations). iii- Briefly explained two (2) implications of control transfer. QUESTION 2: (a) Explain how to determine...
Words: 964 - Pages: 4
...from SAF Sdn Bhd on 23 October 2010 and incurred expenditure as follows: | RM ‘000 | Purchase price (including land cost RM450,000) | 2,500 | Stamp duties | 50 | Legal fees | 15 | Total | 2,565 | The SAF Sdn Bhd had used the factory for the purpose of its business up to 15 September 2010. The residual expenditure as at 31 December 2009 was RM1,020,500. The factory was constructed in 2009 at a cost of RM1,500,000. It was brought into use in November 2009 and capital allowances were claimed for each year. AAN Sdn Bhd used the building as a factory immediately after purchased. On 23 October 2013 AAN Sdn Bhd transferred the factory to its wholly owned subsidiary, ASM Sdn Bhd (financial year-end 30 June) for RM1,200,000 (excluding land cost). The market value at the time of transfer has been RM1,500,000 for the building and RM500,000 for the land. ASM Sdn Bhd engaged in the business of hiring storage space to the public and the building was used as a warehouse for the purposes of its business. REQUIRED: i- Compute the qualifying building expenditure and industrial building allowances of AAN Sdn Bhd for the relevant years of assessment (Show all relevant computations). ii- Determine the qualifying building expenditure and the industrial building allowance(s) of ASM Sdn Bhd for year of assessment 2014 (Show all relevant computations). iii- Briefly explained two (2) implications of control transfer. QUESTION 2: (a) Explain how to determine...
Words: 964 - Pages: 4
...develop the relevant cash flows for a replacement capitalinvestment proposal. The proposed asset costs $50,000 and has installation costs of $3,000.The asset will be depreciated using a five-year recovery schedule. The existing equipment,which originally cost $25,000 and will be sold for $10,000, has been depreciated using anMACRS five-year recovery schedule and three years of depreciation has already been taken.The new equipment is expected to result in incremental before-tax net profits of $15,000 peryear. The firm has a 40 percent tax rate.The tax effect on the sale of the existing asset results in ________. (See Table 8.5) AnswerSelected Answer: $1,100 tax liability. Question 17 4 out of 4 points Table 8.5 Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement capitalinvestment proposal. The proposed asset costs $50,000 and has installation costs of $3,000.The asset will be depreciated using a five-year recovery schedule. The existing equipment,which originally cost $25,000 and will be sold for $10,000, has been depreciated using anMACRS five-year recovery schedule and three years of depreciation has already been taken.The new equipment is expected to result in incremental before-tax net profits of $15,000 peryear. The firm has a 40 percent tax rate.The initial outlay equals ________. (See Table 8.5) AnswerSelected Answer: $44,100 Question 18 4 out of 4 points Table 8.5 Cuda Marine Engines, Inc. must develop the relevant cash flows...
Words: 495 - Pages: 2
...Contents 1:0 TO IDENTIFY THE RELEVANT CASH FLOWS TO EVALUATE THE PRODUCTION OF THE NEW SECURITY RIGHT 1 1.1 OPORTUMNITY COST 1 1.2 CASH FLOWS VS PROFIT 2 1.3 WORKING CAPITAL 2 1.3 OVERHEARDS 2 1.4 SUNK COST 2 2.0 A REPORT ON THE RECOMMENDATION IF THE PROJECT IS ACCEPTED OR REJECTED 3 3.0 TO CALCULATE THE NET PRESENT VALUE OF THE NEW PRODUCT USING GLOW PLC 3 4.0 TO CALCULATE THE INTERNAL RATE OF RETURN 4 5.0 TO WRITE A REPORT ON THE ADVISABILITY OF ACCEPTING THE CONTRACT AND ANY ADDITIONAL FACTORS TO BE CONSIDERED 5 1:0 TO IDENTIFY THE RELEVANT CASH FLOWS TO EVALUATE THE PRODUCTION OF THE NEW SECURITY RIGHT For the financial managers to evaluate investment opportunities, they must first determine the relevant cash flows which are the incremental investment and resulting subsequent inflows associated with the proposed capital expenditure. Incremental cash flows are the additional operating cash flow that an organization receives from taking on a new a project, and this incremental cash flow is divided into scenarios and namely; the positive incremental cash flow and the negative cash flow. The positive incremental cash flow means that the company’s cash flow will increase with the acceptance of the project and vice versa. The following are the relevant cash flows that have been identified in the production of the new security right in Glow Plc. of an Irish manufacturer. 1.1 OPORTUMNITY COST Opportunity cost refers to what you have to give up buying what...
Words: 1809 - Pages: 8
...The purpose of this case is to illustrate the importance of understanding cost behavior in calculating the profit/contribution of the Craddock Cup. Within this context, the case asks whether the tournament should be continued, expanded or dropped. In addition, the case provides a vehicle to discuss allocation procedures and the concept of sunk costs. Finally, the case furnishes an opportunity to develop cost-volume-profit analysis within the context of relevant costs and revenues. Questions: 1. In determining whether to keep or drop the Craddock Cup, review in detail the overhead expense allocations currently used by the CYSL. Should the overhead allocations be revised, eliminated or retained? What are the financial results to the profit/loss to CYSL of the existing (32 team) Craddock Cup with any adjustments to allocations? With this analysis, should the Craddock Cup be retained? *Please see Figure 1.1 in Appendix for profit statement and relevant figures. After looking at the numbers we decided to eliminate Rivaldo’s salary, we determined that the overhead expense allocations currently in place are not appropriate. The city field rent should be eliminated from the allocated costs as the soccer league will be renting the field regardless of whether or not the Craddock Cup occurs; it is a sunk cost. This also applies to the CYSL office rent and utilities, which will be used by the employees whether or not the tournament is held. We needed to revise the salary allocation...
Words: 605 - Pages: 3
...number) Level Credit value Learning outcomes The learner will… 1 Understand the cost recording system within an organisation Basic Costing 2 (Level 5 in Scotland) 8 (4 knowledge and 4 skills) Assessment criteria The learner can… 1.1 K 1.2 K 1.3 K 1.4 K 1.5 K 2 Be able to use the cost recording system to record or extract data 2.1 K 2.2 K 2.3 S Explain the nature of an organisation’s business transactions in relation to its accounting systems Explain the purpose and structure of a costing system within an organisation Identify the relationship between the costing and accounting systems within an organisation Identify sources of income and expenditure information for historic, current and forecast periods Identify types of cost, profit and investment centres Explain how materials, labour and expenses are classified and recorded Explain different methods of coding data Classify and code cost information for materials, labour and expenses Classify different types of inventory as: Raw materials Part-finished goods (work in progress) Finished goods Calculate inventory valuations and issues of inventory using these methods : First in first out (FIFO) Last in first out (LIFO) Weighted average Use these methods to calculate payments for labour: Time rate Piecework rate Bonuses Explain the nature of expenses and distinguish between fixed, variable and semi-variable overheads Calculate the direct cost of a product or service Enter income and expenditure data into a spreadsheet...
Words: 10263 - Pages: 42
...Super Project Case • What are the relevant cash flows that General Foods should use in evaluating the Super Project? In particular, how should management deal with such issues as o Test-market expenses? o Overhead Expenses? o Erosion of Jell-O contribution margin? o Allocation of charges for the use of the excess agglomerator? The relevant cash flows that General Foods should use in evaluating the Super Project are considered Incremental cash flows and are “the changes in the firm’s cash flows that occur as a direct consequence of accepting the project”. Incremental cash flows include changes in working capital; cost of project, overhead expenses, erosion of Jell-o margin, opportunity cost (allocation of charges for the use of the excess agglometor), net proceeds and tax savings from the sale of old assets. General Foods Accounting and Financial Manual specified that capital project request be prepared on an incremental basis. Although Super Project incurred an expense of testing the market, this expense must not be included in the cash flow analysis because it can be considered a sunk cost. General Foods expected Super to capture a 10% share of the total desert market. This expense is required for conducting market research and will not be recovered. Sources of cash flow include, Overhead expenses, which must be included in the cash flow analysis. The estimated expansion of the Super Project to capture 80% of the market will require extra capital and...
Words: 507 - Pages: 3
...is a decision-making method that utilizes the concept of relevant costs. Under this method, the decision involves the following steps: (1) gather all costs associated with each alternative; (2) drop the sunk cost; (3) drop those costs that do not differ between alternatives; and (4) select the best alternative based on the remaining cost data ("All Business: Your Small Business Advantage", 2005). Incremental analysis is primarily used to decode costs associated with a particular project—buying or selling, making or buying etc., whereas comprehensive analysis is gathering information for the entire company. Comprehensive analysis refers to the complete analysis of every relevant aspect of a company's financial operations. The goal of such analysis is to provide a complete picture of the financial status of a company both in the current time and projected into the future. (“Wise Geek”, 2003). Incremental Analysis The main purpose of an incremental analysis is to properly identify the relevant costs and revenues concerning multiple options imminent to assist managers with making a decision. When a manager has identified and divided these options into variable and fixed costs, they will then be able to solve any problems that may have occurred and finally make a decision. RICHA (2014), “Incremental analysis is an effective tool to determine the best alternative that can yield the highest revenues with the least costs. Gathering the required financial information on all the...
Words: 704 - Pages: 3
