SCHOOL OF POST-GRADUATE STUDIES
MASTERS OF BUSINESS ADMINISTRATION
FINANCIAL
MANAGEMENT
INDIVIDUAL ASSIGNMENT
Surafel Samuel
UU81501E
MBAE1/12
Activity 24-2
A manager of Dutch’s Sporting Goods Company is considering accepting an order
from an overseas customer. This customer has requested an order for 20,000 dozen
golf balls at a price of $15.00 per dozen. The variable cost to manufacture a dozen
golf balls is $13.00 per dozen. The full cost is $17.00 per dozen. Dutch’s has a normal
selling price of $23.00 per dozen. Dutch’s plant has just enough excess capacity
on the second shift to make the overseas order.
What are some considerations in accepting or rejecting this order?
Solution
Net Income (NI) = Total Revenue – Total Cost
Total Revenue=Selling Price Per Dozen(P) * Number of Dozens Sold(Q)
Total Cost = Total Variable Cost + Total Fixed Cost (F)
Total Variable Cost = Variable Cost Per Dozen (V) * Number of Dozens Sold (Q)
Order
Selling Price Per Dozen P1 and P2
Number of Dozens Sold Q1 and Q2
Variable Cost Per Dozen V1 and V2
Total Cost
Normal Production
15
23
20000
Q2
13
V2
17
The considerations in accepting or rejecting this order are:
CONDITION 1
Break Even Analysis
Net Income (NI) = Total Revenue – Total Cost = 0
P1*Q1 + P2*Q2 = TC (Q1 +Q2)
15*20000 + 23*Q2 = 17 (20000 + Q2)
Q2 = 6666.67
6666.666667
The quantity that is going to be produced must be greater than or equal to 6667+20000= 26667
CONDITION 2
Total Cost Q1= Total Variable Cost V2 + Total Fixed Cost (F)
17*20000 = 13*20000 + F
F = 80000
80000
The fixed cost must be equal to 80000 for the given period of production
CONDITION 3
Net Income (NI) = Total Revenue – Total Cost = 0
P1*Q1 + P2*Q2 = (V1*Q1 +V2*Q2) + F
15*20000 + 23*6666.67 = (13*20000 + V2*6666.67) + 80000
V2=17
17
The variable cost of producing under normal condition must be maximum of 17 per dozen
Activity 24-3
If you are not familiar with priceline.com, go to its Web site. Assume that an individual
bids $50 on priceline.com for a room in Dallas, Texas, on August 24. Assume that August
24 is a Saturday, with low expected room demand in Dallas at a Marriott hotel, so there
is excess room capacity. The fully allocated cost per room per day is assumed from hotel
records as follows:
Housekeeping labor cost*
Hotel depreciation expense
Cost of room supplies (soap, paper, etc.)
Laundry labor and material cost*
Cost of desk staff
Utility cost (mostly air conditioning)
Total cost per room per day
25
37
5
10
5
3
85
*Both housekeeping and laundry staff include many part-time workers, so that workload
can be matched to demand.
Should Marriott accept the customer bid for a night in Dallas on August 24 at a price
of $50?
Solution
Variable Costs:
Housekeeping labor cost*
Cost of room supplies (soap, paper, etc.)
Laundry labor and material cost*
Utility cost (mostly air conditioning)
Fixed Costs:
25
Hotel depreciation expense
5
Cost of desk staff
10
3
43 per room per day
The total cost per room per day
85 per room per day
The relevant cost (Variable) of the room
43 per room per day
Incremental revenue (for accepting the offer)
(50$*1 day)-(43$*1 day)
$7
Marriot should accept the customer bid for a night at a price of $50 because of the above incremental revenue i.e. $7
and the fact that it is a Saturday with low expected room demand
37
5
42 per room per day