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Principles for comparison and Sunk cost

Analyzing the production and profitability of two products, A and B, based on demand, processing time, cost, and profit. Evaluating the reimbursement and selling price of an airline ticket based on different scenarios. Comparing the development costs of two proposals, A and B, and recommending the most cost-effective option.

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Principles for comparison and Sunk cost

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  1. Principles for comparisonand Sunk cost

  2. Problem 1-6 • Company Q is manufacturing Product A and Product B, one unit of each kind everyday. The processing time of each product is 4 hours, and then cost and profit per day were computed as shown below. The item “overhead expense” in the table means the value that is obtained by allocating a daily fixed cost of $140 in proportion to the sum of labor cost and material (and other variable) cost. The labor cost is assumed to be the fixed monthly salary to employees. If each product has enough daily demand, which product would you like to produce and sell everyday: 2 units of product A or two units of product B?

  3. 1-6

  4. Problem 1-10 (a) John, an employee of Tokyo headquarter office, was asked to visit Fukuoka branch office as a business trip. He bought a round trip airline ticket with $208. The ticket would be valid for 5 days. One-way ticket between Tokyo and Fukuoka was $120. If the return trip ticket was not used, the airline company could reimburse the difference between the round trip ticket cost and the one-way ticket cost (i.e., the refund amount was $88). A night flight called “Aurora” was available, and its one-way fare was $84. Question (a): John was working at Fukuoka branch office. Because of his busy schedule, he thought he would stay more than 5 days. While John was talking with his secretary about the reimbursement of the ticket from the airline company, a close friend Jack visited John’s office. Jack was asking John to sell the return ticket with a reasonable price. How much should John ask for so that John didn’t suffer a loss.

  5. 1－10 A key of this problem is how you can set up the proposals for comparison. Question（１）John is now really busy for his work. Therefore, John has only two options: “Ask his secretary to cancel his ticket” or “Sell the ticket to Jack”. It will be impossible to sell the ticket at the corner of a street. Denote the ticket selling price to Jack by X. Therefore, if x＞$88 it is profitable to sell the ticket to Jack. However, Jack will not buy the ticket by more than $120 (which is a regular ticket price). The answer will be $88＜x＜$120.

  6. Problem 1-10 (b) Question (b): If John might come back to Tokyo within 5 days, how much should John ask for the ticket?

  7. （２） Let y be the price of the transportation ticket from Fukuoka to Tokyo. The proposals for comparison and revenue are given as follows: The answer is given as follows: When John considers to go back to Tokyo by Aurora (y＝8400円）、x＞$88. The reason is that alternative (3) already earns $4, the value X for alternative (2) must be more than $88 When John considers to go back to Tokyo by train (Assume y＝$100）、X＞$100. When John considers to go back to Tokyo by bus (Assume y＝$60）、X＞$88. Can you explain why we do not consider the transportation to Tokyo in Question (1), and why we do consider the transportation to Tokyo in Question (2)?

  8. Problem 2-1 • Two months ago, two candidate proposals, A and B, were reported to have a good chance of success in the development of a new product. Development costs of $100,000 for proposal A and $60,000 for product B were expected. Although the estimation of the development cost for proposal A was certain, the estimation for proposal B was very uncertain so that an additional feasibility study was suggested. • The feasibility study of proposal B was performed last month with a cost of $20,000. Today, the result of the study proved that the development cost of $90,000 instead of previously estimated $60,000 would be necessary for proposal B. It seems that the total required development costs are $100,000 for proposal A and $110,000 (=$20,000+$90,000) for proposal B. • You must recommend one of the two proposals in tomorrow’s executive meeting. Which proposal should be chosen so as to minimize the total development cost? State your reason briefly.

  9. 2-1 What are proposals for comparison? What is a sunk cost? Selection of proposal A Selection of proposal B

  10. 2-1 （continued) Selection of proposal A $100,000 $20,000 $90,000 Selection of proposal B Ans. Selection of proposal B is cheaper

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