Questions:

Figure A:

1. Based upon Figure A, prepare a per unit contribution margin income statement (only through the contribution margin line). Hint: Prepare in Excel and paste the object into Word.

2. Based upon Figure A, prepare a contribution margin income statement (only through the contribution margin line) on a percent of sales basis.

3. They are considering stopping the internet part of the business to focus on the wholesale part. They believe that the 800 packages of internet sales will all shift to wholesale sales. Prepare an updated contribution margin income statement.

4. Calculate the revised unit breakeven point if the change in #3 is executed.

5. After reviewing the results, the owners realize that the internet side has a higher contribution margin. They decide not to execute the changes proposed in #3. Instead, they decide to spend $3,000 in an advertising campaign. This campaign is expected to generate 200 more packages sold wholesale and 500 packages sold on the internet. Calculate the new net income if these assumptions are correct (show your work or prepare a new contribution margin income statement).

6. Should the advertising campaign be pursued?

7.

Assume that they decided to end the internet side of the business after a few years. Figure B below represents the most recent 6 months of the business activity (all wholesale):

Figure B:

Based upon Figure B, what is the companys degree of operating leverage?

8. Assume the amounts from Figure B. If sales increased by 50%, what percentage would net operating income change by?

9. Assume the facts in Figure B. What is the companys contribution margin ratio?

10. Assume the amounts in Figure B, how many units would need to be sold to breakeven? To achieve a net income of $150,000?

Part B:

Understanding and Quantifying Incremental & Opportunity Costs for Decision Making

College Costs Case Study

Instructions:

Read and highlight/underline the article, College Degree for Everyone that was published in the May 2015 issue of International Advances in Economic Research. After you have finished reading the article, answer the following questions:

11. A core reason that motivated the researchers to explore this topic was their concern that a college education, when treated as an asset, may be in an asset bubble.

a. Generally speaking, what is the definition of an asset bubble?

b. Provide an example (other than college education) of a recent asset bubble discussed in this article. What circumstances led to the bubble forming?

c. List three of the major indicators that the study cites as being potential indicators of a developing asset bubble in college education (hint: refer to the motivation section and figures)

d. Brainstorm some of the individual & societal consequences if there is indeed an asset bubble in education.

12. When determining whether a college degree is worth pursuing, which of the following cost principles are relevant to the decision-making process (there may be more than one correct answer in the list): Opportunity costs, sunk costs and/or incremental costs/benefits.

13. Ignoring non-financial factors, what are the opportunity costs of receiving a college education?

14. The analysis used by the authors of this study focus on incremental differences in the fundamental value of two defined assets.

a. What are the two alternative assets that the study is centered on?

b. What is the general financial method used to assess the value of these assets (hint: it has to do with (in the formula).

c. What are the two formulas used to specify the fundamental value of these assets?

15. Evaluate Figure 4 below. What are the major conclusions that you can derive from this graph?

16. Evaluate Figure 5 below. What are the major conclusions that you can derive from this graph?

17. Evaluate Figure 6 below. What does Point A indicate? Point B?

A

B

18. What are the implications of the findings for undergraduate students considering a college degree?

19. What external statistic does the article use to support the finding that as much as 13% of the population that obtains a college degree would be better off not getting the degree? Do you feel this is an accurate conclusion?

20. What is assumption used in the length of time necessary to complete college? Is this accurate and how is this likely to impact the overall results?

21. What is the specific population used to represent the population of students who graduate with an undergraduate degree? Is this accurate and how is this likely to impact the overall results?

22. Are there other, non-monetary factors, that should be considered by those considering attending college? If so, what are they?

23. This study assumes that the benefits and costs to all students in a similar type of institution are relatively uniform. The study cites other literature that suggests that other factors are relevant to the decision-making process. What are some of those factors?

24. What are some of the limitations of the study?

25. Propose a study that expands upon this issue in some way.

\begin{tabular}{llcc} \hline & Total & Per unit & Percentage of sales \\ \hline Sales (40,000 packages) & $160,000 & $4.00 & 100.00% \\ Variable Expenses & $60,000 & $1.50 & 37.50% \\ Contribution Margin & $100,000 & $2.50 & 62.50% \\ Fixed Expenses & $12,250 & & \\ Net Operating Income & $87,750 & & \\ \hline \end{tabular} I 1yo4. saa source: ivirin ers 1904 and aumors caicurauns ] March CY'S LU1I and authors' calculations in 2010. Data Source: March CPS 2011 and authors' calculations \begin{tabular}{llcc} \hline & Total & Per unit & Percentage of sales \\ \hline Sales (40,000 packages) & $160,000 & $4.00 & 100.00% \\ Variable Expenses & $60,000 & $1.50 & 37.50% \\ Contribution Margin & $100,000 & $2.50 & 62.50% \\ Fixed Expenses & $12,250 & & \\ Net Operating Income & $87,750 & & \\ \hline \end{tabular} I 1yo4. saa source: ivirin ers 1904 and aumors caicurauns ] March CY'S LU1I and authors' calculations in 2010. Data Source: March CPS 2011 and authors' calculations