You may consult your colleagues, but provide your own solution.
Problem 1:
Zap, Inc., manufactures and sells a broad leaf herbicide that kills unwanted
grasses and weeds. Via their television infomercials, Zap encourages
homeowners to “take control of their yards” by purchasing one of their “ZAP”
kits. Each ZAP kit includes a 32-ounce bottle of weed and grass killer concentrate
and a 16-ounce bottle of poison ivy and tough brush killer concentrate.
Anticipating high sales, Zap produced 50,000 ZAP kits at a cost of $7.50 per kit.
Unfortunately, Zap overestimated the demand for their product. After a year of
infomercials, the company had only sold 25,000 units at a price of $19.95 per unit.
The company is in a quandary about what to do with the remaining 25,000 units.
Zap could sell the remaining 25,000 units to a national home-improvement store
for $7.00 a unit. Alternatively, the company could sell the product via its Web
site—under this option, Zap believes they could sell 60% of the remaining units if
they reduced the price to $9.95. (Any remaining units would be thrown away).
Finally, Zap has ruled out running additional infomercials due to the high cost of
TV advertising.
Required:
a. What is Zap’s decision problem, including its goals?
b. What are Zap’s options with respect to the 25,000 unsold ZAP kits?
c. What is the increase in cash flow associated with each of Zap’s
options?
d. What should Zap do with the remaining ZAP kits?
Problem 2:
The following costs relate to a manufacturing organization
Sales commissions Sales manager salary
Distribution costs Production supervisor
Factory rent Corporate office expenses
Product components Supplies used in manufacturing
Direct manufacturing labor Plant manager salary
Required:
Classify the costs as product costs or period costs. Also classify the costs as variable
or fixed with respect to the volume of production. What inferences do you draw
about the correspondence between the two concepts?
Problem 3:
Ajay Singh plans to offer gift-wrapping services at the local mall during the month
of December. Ajay will wrap each package, regardless of size, in the customer’s
choice of wrapping paper and bow for a price of $3. Ajay estimates that his variable
costs will total $1 per package wrapped and that his fixed costs will total $600 for
the month.
Required:
a. Express Ajay’s profit before taxes in terms of the number of packages sold.
b. How many packages does Ajay need to wrap to break even?
c. How many packages must Ajay wrap to earn a profit of $1,400?
Problem 4 (optional):
Mountain Maples is a mail-order nursery dedicated to growing, selling, and
shipping beautiful Japanese Maple trees. Located on a ridge-top in Mendocino
County, northern California, Mountain Maples offers two distinctive types of
Japanese Maples: Butterfly and Moonfire. The trees are sold after five growing
seasons, and revenue and cost data for each tree type (for the most recent year) are
as follows:
Butterfly Moonfire
Quantity sold 800 1,600
Selling price per tree $200 $100
Variable cost per tree $100 $50
Mountain Maples’ fixed costs for the most recent year were $75,000.
Required:
a. How many Japanese Maples must Mountain Maples sell in a year to break
even? At this sales volume, how many Butterfly and Moonfire trees are sold?
b. At the current product mix, how many Butterfly trees must Mountain Maples
sell in a year to earn a profit of $50,000?
c. Assume that Mountain Maples product mix changes to 50% Butterfly and 50%
Moonfire. How does this information change your answer to part (a)?
