1 A Cynthia, a Philly student, is considering visiting her friend in New York. She can drive or take the train. By car, it is 150 miles to her friend's apartment. She is trying to decide which alternative is less expensive and has gathered the following information. Automobile Costs (based on 10,000 miles driven per year) Additional Information Annual Cost 7 Reduction in resale value of car per mile of wear $ 0.026 of Fixed Items Cost per Mile 8 Round-tip train fare $ 104 1 Annual straight-line depreciation on car $ 2,800 $ 9 Benefits of relaxing on train trip ???? 2 Cost of gasoline 0.100 10 Cost of putting dog in kennel while gone 3 Annual cost of auto insurance and license 1,380 0.138 11 Benefit of having car in New York ???? 4. Maintenance and repairs 0.065 12 Hassle of parking car in New York ???? 5 Parking fees at school 360 0.036 13 Per day cost of parking car in New York 25 6 Total average cost $ 0.619 0.280 40 A A Which costs and benefits are relevant in Cynthia's decision when making the trip? (Irrelevant cost is going to be there no matter what.) Total relevant cost if driving: if taking the train Minus: relevant benefit if driving: Net "cost" Net "cost" 2 The management of a company is considering a new labor saving machine that rents for $3,000 per year. Data about the company's annual sales and costs with and without the new machine are: Situation Differential Current With New Costs and We can efficiently analyze the decision by looking at the Situation Machine Benefits different costs and revenues and arrive at the same solution. Sales (5,000 units @ $40 per unit) $ 200,000 $ 200,000 Less variable expenses: Direct materials (5,000 units @ $14 per unit) 70,000 70,000 Direct labor (5,000 units @ $8 and $5 per unit) 40,000 25,000 15,000 Variable overhead (5,000 units @ $2 per unit) 10,000 10,000 Total variable expenses 120,000 105,000 Contribution margin 80,000 95,000 15,000 Less fixed expense: Other 62,000 62,000 Rent on new machine (3,000) Total fixed expenses 62,000 65,000 (3,000) Net operating income $ 18,000 $ 30,000 12,000 3,000