4-12. By using unit contribution margins, we only consider revenues and variable costs that are differential to our decision. While relying on unit gross margins would probably lead to incorrect decision because we take into account revenues and all costs, including both variable costs and fixed costs. However, some costs are not differential to our decision.
4-15. Nonfinancial factors in decisions to drop a product line include the effect on employees who work on that product line, the effect on community if the plant is closed, and the effect on other product lines.
4-24. In the short run, by considering fixed costs in the analysis, the manager might be including irrelevant information. If the fixed costs will be incurred whether the special order is accepted or rejected, these costs should not bear on the decision. So in the short run, the company should accept the special order if the revenue covers the differential costs, assuming that the price of the special order does not affect other business at the company. However, in the long run, all costs should be covered because fixed costs might change and thus become relevant.
4-35. Pricing Decisions
1.
Status Quo: Alternative: Reject Special Offer
(20,000 bottles) Accept Special Offer
(22,000 bottles) Difference
Comparison of Totals
Sales revenue $ 100,000a $ 107,000c $ 7,000
Variable costs (60,000)b (66,000)d (6,000)
Total contribution $ 40,000 $ 41,000 $ 1,000
Fixed costs (20,000) (20,000) -
Operating profit $ 20,000 $ 21,000 $ 1,000

a $5.0 x 20,000 = $100,000 b $(1.50+1.00+0.50)x 20,000 = $60,000 c $3.5 x (20,000+2,000) = $107,000 d $60,000 + $3.0 x 2,000 = $66,000
The operating profit would be higher by $1,000 if accepting the special offer.
2. The lowest price per unit should cover only variable cost. So it should be $1.50 + $1.00 + $0.50 = $3.00 per unit.
3.One factor