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A high-level, simplified profit/loss statement for the company is provided here. Corporate overhead (rent, general and administrative expense, etc.) is allocated equally among the three product versions. After reviewing the statement, company managers are concerned about the loss on Version Z and are considering ceasing production of that version. Should they do so? Why or why not?
| |Version X |Version Y |Version Z |Total |
|Net Can Sales |$180,000 |$240,000 |$105,000 |$525,000 |
|Variable Costs |105,000 |135,000 |82,500 |322,500 |
|Corporate Overhead |60,000 |60,000 |60,000 |180,000 |
|Contribution to Profit |15,000 |45,000 |-37,500 |22,500 |
Opportunity Cost of Renting
You currently pay $10,000 per year in rent to a landlord for a $100,000 house, which you are considering purchasing. You can qualify for a loan of $80,000 at 9% if you put $20,000 down on the house. To raise money for the down payment you would have to liquidate stock earning a 15% return. Neglect other concerns, like closing costs, capital gains, and tax consequences of owning, and determine whether it is better to rent or …show more content…
The book’s description is “Achieve zero-defect product quality by eliminating the root causes of your equipment defects. An easy-to-read case study of TPM, TQC and JIT at a world class manufacturing plant.” Without reading this book, we know that its advice is wrong. How do we know?
Shoe Company
A domestic shoe company distributes running shoes and tennis shoes for $95 per pair. The marginal cost of producing a pair of running shoes is $60 and the marginal cost of producing a pair of tennis shoes is $45. A Chinese retailer offers to purchase running shoes for $55 per pair and tennis shoes for $55 per pair for distribution in China. Should the shoe company sell any shoes to the Chinese retailer? (Ignore any potential issues of bundling the two types of shoes together as part of the sale and any competitive effects that international sales might have on current domestic sales.)
In-Sourcing Sales
| |Version X |Version Y |Version Z |Total |
|Net Can Sales |$180,000 |$240,000 |$105,000 |$525,000 |
|Variable Costs |105,000 |135,000 |82,500 |322,500 |
|Corporate Overhead |60,000 |60,000 |60,000 |180,000 |
|Contribution to Profit |15,000 |45,000 |-37,500 |22,500 |
Opportunity Cost of Renting
You currently pay $10,000 per year in rent to a landlord for a $100,000 house, which you are considering purchasing. You can qualify for a loan of $80,000 at 9% if you put $20,000 down on the house. To raise money for the down payment you would have to liquidate stock earning a 15% return. Neglect other concerns, like closing costs, capital gains, and tax consequences of owning, and determine whether it is better to rent or …show more content…
The book’s description is “Achieve zero-defect product quality by eliminating the root causes of your equipment defects. An easy-to-read case study of TPM, TQC and JIT at a world class manufacturing plant.” Without reading this book, we know that its advice is wrong. How do we know?
Shoe Company
A domestic shoe company distributes running shoes and tennis shoes for $95 per pair. The marginal cost of producing a pair of running shoes is $60 and the marginal cost of producing a pair of tennis shoes is $45. A Chinese retailer offers to purchase running shoes for $55 per pair and tennis shoes for $55 per pair for distribution in China. Should the shoe company sell any shoes to the Chinese retailer? (Ignore any potential issues of bundling the two types of shoes together as part of the sale and any competitive effects that international sales might have on current domestic sales.)
In-Sourcing Sales