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MANAGERIAL ACCOUNTING QUESTIONS

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You operate a lemonade stand. The wholesale cost of lemonade is $0.50 per unit. The cost of rent for the stand is $30 per day. You need to choose your pricing and advertising strategy. You are considering three alternatives: A: If you set the selling price to $1.50 per unit and spend $0 on advertising, you will sell 160 units per day. B: If you reduce the selling price to $1.20 per unit and spend $0 on advertising, you will sell 240 units per day. C: If you set the selling price to $1.50 per unit and spend $30 per day on advertising, you will sell 240 units per day. a) Compute revenue, costs, and profit per day for each alternative. Costs: Lemonade (wholesale) Rent chvrisi Profit b) Which alternative should you choose? OB O C c) Is rent a relevant cost? NO (the cost is the same for all three alternatives; it can be ignored) O YES (the cost differs across alternatives; it should not be ignored) d) Is advertising a relevant cost? O YES (the cost differs across alternatives; it should not be ignored) NO (the cost is the same for all three alternatives; it can be ignored)