Special Sales Offer Relevant Analysis:
1. Note: Sales commissions costs and advertising costs are irrelevant because
they are marketing in nature. Similarly, customer hotline service costs are
irrelevant because they are customer service in nature (see bulleted points in
exercise).
b. Relevant costs from the special sales offer:
Relevant variable costs:
Direct materials $1.00
V
ariable manufacturing overhead 0.75
Direct manufacturing labor 0.25
$
2.00
/
pound
Relevant fixed costs:
Batch Costs = Cost per Batch × Number of Batches Required by Special
Sales Offer
Batch Cost for Special Sales Offer = (Batch Costs/Number of Batches) ×
(Special Sales Units/Number of Units per Batch)
= ($40,000/20) × [10,000/(100,000/20)]
= ($2,000 cost per batch) × (2 batches required by special sales offer)
= $4,000
NET PRESENT VALUE ANALYSIS FOR NOFAT
RELEVANT COSTING, COST-BASED PRICING, COST BEHAVIOR, AND
INTEGRATIVE EXERCISE (Chapters 3, 5, 8, and 12)
MAKING THE CONNECTION:
Making the Connection Integrative Exercise (Chapters 3, 5, 8, and 12)
c. Relevant profit from special sales offer:
Relevant revenues $ 22,000
–
Relevant costs (25,000)
= Relevant profit $ (3,000)
3. A potentially important qualitative factor is product reputation, namely the
public’s perception of olestra’s safety. In particular, some (possibly large)
percentage of NoFat’s customers might be concerned that olestra is not a safe
ingredient for human ingestion, given its apparent effectiveness in cleaning up
toxic waste sites. As a result, the acceptance of PU’s special sales offer might
significantly decrease NoFat’s regular sales of olestra.
Cost-Based Pricing:
4. a. NoFat’s cost-plus pricing rule produces the following total revenue:
Total Revenue = (Number of Units × Variable Cost per Unit) × 1.10
= [10,000 units × ($1.00 + $0.75 + $0.50 + $0.25)] × 1.10
= (10,000 units × $2.50) × 1.10
= $25,000 × 1.10
= $27,500
b.
Relevant revenue $ 27,500 (see solution to Requirement 4a)
–
Relevant costs (25,000) (see solution to Requirement 1b)
= Relevant profit $ 2,500
Making the Connection Integrative Exercise (Chapters 3, 5, 8, and 12)
Incorporating a Long-Term Horizon into the Decision Analysis:
5. a. Annual Net Cash Inflow from Special Sales Relevant Profit Discount Factor
= $10,000 × 3.79079 (discount factor from Exhibit 12B.2 in Appendix 12B
b. Net cash inflow from downsizing the facility:
(1) Cash inflow from immediate sale of one building for $30,000 (no need
to discount cash flow because it occurs at time 0)
(2) Annual lease cost decreases from $12,000 to $9,000. This cost decrease of
$3,000 represents an annual $3,000 increase in cash inflow. The present
value of this annuity equals:
$3,000 × 3.79079 (discount factor from Exhibit 12B.2 in Appendix 12B to Chapter
12 for an annuity of uniform cash flows that corresponds to a rate of 10%
and a 5-year time period) = $11,372