Special Sales Offer Relevant Analysis:
1. Note: Sales commission 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).
a. Relevant revenues from the special sales offer:
b. Relevant costs from the special sales offer:
Relevant variable costs:
Relevant fixed costs:
Batch Costs = Cost per Batch × Number of Batches Required by Special
Sales Offer
Plant inspection team cost if special sale is accepted
= $1,000
= $4,000 + $1,000 = $5,000 relevant fixed costs
NET PRESENT VALUE ANALYSIS FOR NOFAT
RELEVANT COSTING, COST-BASED PRICING, COST BEHAVIOR, AND
Making the Connection:
INTEGRATIVE EXERCISE (Chapters 11–14)
MTC3-1
Making the Connection Integrative Exercise (Chapters 11–14)
c. Relevant profit from special sales offer:
= Relevant profit $ (3,000)
2. The relevant cost of $25,000 is higher than the relevant revenue of $22,000
3. A potentially important qualitative factor is product reputation, namely the
public’s perception of olestra’s safety. In particular, some (possibly large)
Cost-Based Pricing:
4. a. NoFat’s cost-plus pricing rule produces the following total revenue:
b.
Relevant revenue $ 27,500 (see solution to Requirement 4a)
– Relevant costs (25,000) (see solution to Requirement 1b)
= Relevant profit $ 2,500
MTC3-2
Making the Connection Integrative Exercise (Chapters 11–14)
Incorporating a Long-Term Horizon into the Decision Analysis:
5. a. Annual Net Cash Inflow from Special Sales Relevant Profit × Discount Factor
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
c. Based on the NPV of Calculations a and b, the downsizing alternative (i.e.,
MTC3-3