Chapter 1+2: Nature of costs + Opportunity costs
Question 1-6: Average costs
• Unit costs includes fixed costs and variable costs.
• Usually, we sell in Germany, but now we get a special offer from Japan.
A) → Find the weekly fixed costs the company incurs in both situations:
Step 1:
• 𝑇𝐶 = 𝐹𝐶 + 𝑉𝐶 ∗ 𝑄
𝐹𝐶
• 𝐴𝐶 = 𝑄
+ 𝑉𝐶
𝑇𝐶
o 𝐴𝐶 = 𝑄
Step 2 → Situation pre-offer:
𝐹𝐶
• 3.5 = + 1.1
500
o VC = 1.10 → 3.10 − 2
𝐹𝐶
• 2.4 = 500
• 2.4 ∗ 500 = 𝐹𝐶
• 𝐹𝐶 = 1200
Step 3 → Situation post-offer:
𝐹𝐶
• 3.1 = 600 + 1.1
𝐹𝐶
• 2 = 600
• 2 ∗ 600 = 𝐹𝐶
• 𝐹𝐶 = 1200
B) → Find if company should accept the offer:
Step 1: Find out the change in total costs if offer is accepted:
• 𝑄2 ∗ 𝐴𝐶2 − 𝑄1 ∗ 𝐴𝐶1
• 600 ∗ 3.1 − 500 ∗ 3.5
• 1860 − 1750 = 110
Step 2: Compare this with additional revenue incurred:
• 2 ∗ 100 = 200
o Additional revenue = 200
o Additional costs = 110
1
, • Additional profit = 90 → Accept offer.
C) → What other factors should the company consider before accepting the offer:
• Does it affect the prices in Europe?
• Is there a potential of future deals?
• Is the customer creditworthy → What are the sale terms?
Question 2-3: Opportunity costs (theory)
• Commercial-free radio station → So only revenue is through pledging twice a year.
A) There are opportunity costs involved → These are incurred to the listeners, as they don’t get to
listen to the radio. For the radio station itself these are no costs.
Question 2-5: Opportunity costs (calculations)
• Lease rental payments of H.A. (72,000) > profits from operations (71,000) → You should
lease this department.
o However, consider inventory holding costs and externalities.
▪ Less people may come in the store if they can only buy televisions.
2
,Question 2-9: Negative opportunity costs
Question 2-21: Period/product cost; direct labour/direct material/overhead
• If something is a period cost, it can’t be direct labour/material/overhead costs anymore (as
these are all direct and related to the product).
• Assembly worker wage premium is put with overhead (unlike direct labour like the assembly
line wages), because it is difficult to assign it to one specific product.
3
, Question 2-34: Break-even costs + Tax + Find Q + Find charge price
A)
B)
C)
4
Question 1-6: Average costs
• Unit costs includes fixed costs and variable costs.
• Usually, we sell in Germany, but now we get a special offer from Japan.
A) → Find the weekly fixed costs the company incurs in both situations:
Step 1:
• 𝑇𝐶 = 𝐹𝐶 + 𝑉𝐶 ∗ 𝑄
𝐹𝐶
• 𝐴𝐶 = 𝑄
+ 𝑉𝐶
𝑇𝐶
o 𝐴𝐶 = 𝑄
Step 2 → Situation pre-offer:
𝐹𝐶
• 3.5 = + 1.1
500
o VC = 1.10 → 3.10 − 2
𝐹𝐶
• 2.4 = 500
• 2.4 ∗ 500 = 𝐹𝐶
• 𝐹𝐶 = 1200
Step 3 → Situation post-offer:
𝐹𝐶
• 3.1 = 600 + 1.1
𝐹𝐶
• 2 = 600
• 2 ∗ 600 = 𝐹𝐶
• 𝐹𝐶 = 1200
B) → Find if company should accept the offer:
Step 1: Find out the change in total costs if offer is accepted:
• 𝑄2 ∗ 𝐴𝐶2 − 𝑄1 ∗ 𝐴𝐶1
• 600 ∗ 3.1 − 500 ∗ 3.5
• 1860 − 1750 = 110
Step 2: Compare this with additional revenue incurred:
• 2 ∗ 100 = 200
o Additional revenue = 200
o Additional costs = 110
1
, • Additional profit = 90 → Accept offer.
C) → What other factors should the company consider before accepting the offer:
• Does it affect the prices in Europe?
• Is there a potential of future deals?
• Is the customer creditworthy → What are the sale terms?
Question 2-3: Opportunity costs (theory)
• Commercial-free radio station → So only revenue is through pledging twice a year.
A) There are opportunity costs involved → These are incurred to the listeners, as they don’t get to
listen to the radio. For the radio station itself these are no costs.
Question 2-5: Opportunity costs (calculations)
• Lease rental payments of H.A. (72,000) > profits from operations (71,000) → You should
lease this department.
o However, consider inventory holding costs and externalities.
▪ Less people may come in the store if they can only buy televisions.
2
,Question 2-9: Negative opportunity costs
Question 2-21: Period/product cost; direct labour/direct material/overhead
• If something is a period cost, it can’t be direct labour/material/overhead costs anymore (as
these are all direct and related to the product).
• Assembly worker wage premium is put with overhead (unlike direct labour like the assembly
line wages), because it is difficult to assign it to one specific product.
3
, Question 2-34: Break-even costs + Tax + Find Q + Find charge price
A)
B)
C)
4
