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# Marginal Cost Analysis

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1) The average variable cost is AVC = 3500 - 6Q + 0.005Q2

a. If the industry is competitive, estimate the shut down price.
b. If the market price is below the shut down price, regardless of fixed cost, explain why the firm should shut down.
c. Using this information, draw the firm's short run supply function.

2) The price elasticity of demand for a textbook sold in the United States is estimated to be -2.0, whereas the price elasticity of demand for books sold in overseas markets is -3.0. The U.S. market requires hardcover books with a marginal cost of \$24.00 while the overseas market is normally served with soft-cover texts having a marginal cost of only \$18.00. Calculate the profit maximizing price in each market. How might these prices become equal?

https://brainmass.com/economics/balance-of-payments/marginal-cost-analysis-127757

#### Solution Preview

1)In a statement of cash flow, the term cash includes:
A) only money on deposit in bank accounts(B)on bank accounts and cash on hand(C) bank accounts, cash on hand, and cash equivalents(D) bank accounts, cash on hand, and cash equivalents and marketable securities classified on current assets

Answer: This is be definition of cash

2) The ownership of common stock in a corporation usually carries the following rights:
A)To vote for directors (B) To declare dividends (C) To share in a distribution of assets if the corporation is to be liquidate (D) both a and c

Answer: This is be definition of common stock

3)If the current assets are \$90,000 and the current liabilities are \$30,000 working capital will be
A)33.3% (B) 3:1 (C) \$60,000 (D) \$120,000

Answer: Working Capital = Current Assets - Current Liabilities

Carlyle, Co. had the following transaction during the month of August,2004
-Cash received from the bank loans was \$5,000
-Dividends of \$2,500 were paid to stockholders in cash.
-Revenues earned and received in cash amounted to \$9,500
-Expenses incurred and paid were \$7,000

4) Refer to the above data .What amount of net income will be reported on an income statement for the month of August, 2004?
A) \$5,000 (B) \$2,500 (C) \$0 (D) \$9,500

Answer: Net Income = Revenue - Expenses - Dividends

5) The field of accounting may best be describe as:
A) Recording the financial transactions of an economics entity.(B) Develop information in conformity with generally accepted accounting principle(C) The art of interpreting, measuring and describing economic activity(D) Developing the information required for the preparation of income tax return

During 2006, the cash flows related to Dodge Data Inc;s lending and borrowing activities are summarized as the follows:
Cash lent to ...

#### Solution Summary

The solution answers two questions related to marginal cost analysis.

\$2.19

## High-low methods, accounting analysis, CVP, and leverage

EXERCISE4-5. High-Low Method

Campus Copy & Printing wants to predict copy machine repair expense at different levels of copying activity (number of copies made). The following data have been gathered: (see attached)

Required
Determine the fixed and variable components of repair expense using the high-low
method. Use copies made as the measure of activity.

EXERCISE 4-8. Account Analysis

Reef Office Supplies is interested in estimating
the cost involved in hiring new employees. The following information is available regarding
the costs of operating the Human Resource department at Reef Office Supplies
in May when there were 50 new hires.

Human Resource Department
May
Staff salaries \$25,000
Manager salary 7,000
Office supplies 200
Depreciation of office equipment 300
Share of building cost (based
on square feet occupied by
Human Resources) 1,500
Total \$34,000

Required
a. Use account analysis to determine fixed cost per month and variable cost per new
hire.
b. The company is planning to hire 60 employees in June. Estimate the total cost of
Human Resources for June..
c. What is the expected incremental cost associated with hiring 10 more employees
than were hired in May?

EXERCISE 4-12. CVP Analysis, Profit Equation

Clyde's Marina has estimated that fixed costs per month
are \$240,000 and variable cost per dollar of sales is \$0.60.

Required
a. What is the break-even point per month in sales?
b. What level of sales is needed for a monthly profit of \$60,000?
c. For the month of July, the marina anticipates sales of \$1,200,000: What is the expected level of profit?

EXERCISE 4-17. Operating Leverage
(see attached for data)
Required
a. Calculate profit as a percent of sales in the prior year.
b. Suppose sales in the current year increase by 20 percent. Calculate profit as a percent
of sales for the new level of sales and explain why the percent is greater than the
one calculated in Part a.

EXERCISE 4-18. Constraints

Dvorak Music produces two durable music stands:

Stand A Stand B
Selling price \$80 \$70
Less variable costs 20 40
Contribution margin \$60 \$30

Stand Arequires 5 labor hours and standB requires 2 labor hours. The company has
only 320 available labor hours per week. Further, the company can sell all it can produce
of either product.

Required
a. Which stand(s) should the company produce?
b. What would be the incremental benefit of obtaining 10 additional labor hours?

PROBLEM 4-12. Multiproduct CVP

Fidelity Multimedia sells audio and video equipment
and car stereo products. After performing a study of fixed and variable costs in the
prior year, the company prepared a product-line profit statement as follows:

Fidelity Multimedia
Profitability Analysis
For the Year Ended December 31,2007
Audio Video Car Total
Sales \$3,000,000 \$1,800,000 \$1,200,000 \$6,000,000
Less variable costs:
Cost of merchandise 1,800,000 1,260,000 600,000 3,660,000
Salary part-time staff 120,000 80,000 30,000 230,000
Total variable costs 1,920,000 1,340,000 630,000 3,890,000
Contribution margin 1,080,000 460,000 570,000 2,110,000
Less direct fixed costs:
Salary, full-time staff 300,000 250,000 210,000 760,000
Less common fixed costs:
Utilities 20,000
Total common fixed costs 690,000
Profit \$660,000

Required
a. Calculate the contribution margin ratios for the audio, video, and car product lines.
b. What would be the effect on profit of a \$100,000 increase in sales of audio equipment
compared with a \$100,000 increase in sales of video equipment, or a \$100,000
increase in sales of car equipment? Based on this limited information, which product
line would you recommend expanding?
c. Calculate the break-even level of sales for the company as a whole.
d. Calculate sales needed to achieve a profit of \$1,500,000 assuming the current mix.
e. Determine the sales of audio, video, and car products in the total sales amount calculated
for Part d.

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