Question 3-7:How do committed fixed costs differ from discretionary fixed cost?

Answer:Committted fixed costs are fixed costs resulting from an organizations ownership or use of facilities and its basic organization structure. For instance, property taxes, depreciation on building and equipment and the salaries of management personnel. Management can change committed fixed costs only through relatively major decisions that have long term implications. Decisions to build a new production facilities, lease of fleet of vehicle or add more management personnel to oversee a new division are example of such decisions. These decisions will generally influence cost incurred over a long period of time. On the other hand, the Discretionary fixed costs arise as a result of management decision to spend a particular amount of money for some purpose. Examples of discretionary fixed costs are the amount of money spent on research and development and contributions to charitable organization or the amount spent on advertisement. Discretionary fixed costs can be changed in short run much more easily. Management can be flexible about expenditure for instance research and development or training programme.In other words, these costs can be reduced substantially for a short period of time without great harm to the company.

Question 3-34 High activity(2002) Low activity(2001) Differences Sales $ 116,000,000 $ 57,000,000 $ 59,000,000 Profits $ 18,000,000 $(19,000,000) $ 37,000,000

Profit per unit sales $37,000,000 59,000,000 = $ 0.06271

Total profit at 116,000,000 sales =$116,000,000*0.6271 Less:Total operating profit Fixed costs Total profit at $57,000,000 sales =$57,000,000*0.6271 Less:Total operating profit Fixed costs

72,745,762 18,000,000 $54,745,763 $35,744,700 $(19,000,000) 54,744,700

Therefore,the operating expenses for EXPEDIA in the first quarter of 2001 $57,000,000-(57,000,000*0.6271) =$21,255,300 The operating expenses for EXPEDIA in the first quarter of 2002 $116,000,000-(116,000,000*0.6271)=$43,256,400 (ii)The cost function for EXPEDIA Y=54,744,700 +0.3729x (iii)According to the nature of the firm, it suggests that is a highly leveraged firm such that a small change in its sales led to substantial increase in operating income.Equivalently,it has relatively higher fixed cost and a smaller per unit variable cost. So the increased sales of 116,00,000 resulted in increased profit of 37,000,000,however,this increased profit had to offset the loss sustained in the first quarter of 2001.In addition, there other factors that might contributed to increased profit such as the increased morale of employees or increased knowledge of the methods of production,cheap sources of raw materials

Question 10 Given The unit selling price of GO yen 7000 Variable cost per unit Fixed overhead Total assets Required: (i)Compute Rate of return that will be earned on total assets Sales 7000*3400 Less variable cost(4800*3400) Contribution margin Fixed cost Net income 23,800,000 16,320,000 74,800,000 6080,000 14,000,000 yen 4800 yen 6080,000 yen 12,500,000

Therefore, the rate of return on total assets is income/total assets 14,000,000/12,500,000 11.2% (ii) expected capital turnover sales/total assets 23,800,000/12,500,000 1.904 times

(ii) Return on sales net income/total sales 14,000,000/23800000 5.88% 10(ii). How many units must be sold to obtain the desired return on total assets if no other part of the budget is changed

sales-variable cost-fixed cost total assets 7000x-4800x-6080,000 12,500,000 =20% =20%

2200x-6080,000=2500,000 2200x=8580,000 x=3900 Therefore the units that must be sold are 3,900 10 (b) (7000*3400)-(4800*3400)-(6080,000-0.1x) 12,500,000- x 23,800,000-16320000-6080,000+0.1x 12,500,000-x 1,400,000+0.1x 12,500,00 =20% =20% =20%

2500,000-.2x=1400,000+0.1x

1,100,000=0.3x x=1100,000 0.3 3,666,667 Therefore the amount of total assets to be reduced will be yen 3,666,667

(ii)should the Kyoto manager sell for yen 6000 per unit? Japanese market: Fixed overhead given=4900,000 Total assets=10,000,000 Rate of return=(2400*7000)-4,900,000-(4,800*2400) 10,000,000 16,800,000-4,900,000-11,520,000 10,000,000 3.8% Acceptance of the offer: Rate of return=1400*6000)+(2400*7000)-6080,000-(3800*4800) 12,500,000 7%

The rate of return in the counter offer is relatively higher than the option of eliminating some assets which generate a lower return.Therefore,the Kyoto manager can accept the counter offer of yen 6000 per unit.