1- Midstate University is trying to decide whether to allow 100 more students into the university. Tuition is $5000 per year. The controller has determined the following schedule of costs to educate students:

Number of Students Total Costs

4000 $30,000,000

4100 30,300,000

4200 30,600,000

4300 30,900,000

The current enrollment is 4200 students. The president of the university has calculated the cost per student in the following manner: $30,600,000/4200 students = $7286 per student. The president was wondering why the university should accept more students if the tuition is only $5000.

Required:

a. What is wrong with the president’s calculation?

b. What are the fixed and variable costs of operating the university?

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2- A company sells three products as shown below:

Product X

Product Y

Product Z

Total

Units

60,000

140,000

50,000

250,000

Sales

$90,000

$150,000

$60,000

$300,000

Variable Costs

$63,000

$93,000

$19,000

$175,000

Contribution Margin

$125,000

Fixed Costs

$100,000

Required:

a. How many units of each product need to be sold to breakeven?

b. How many units must of each product must be sold if the company wants to have a profit of $50,000?

3- The Baltic Company is considering the purchase of a new machine tool to replace an obsolete one. The machine being used for the operation has a tax book value of $80,000, with an annual depreciation expense of $8,000. It has a salvage value (resale value) of $40,000, is in good working order, and will last, physically, for at least 10 more years. The proposed machine will perform the operation so much more efficiently that Baltic engineers estimate that labor, material, and other direct costs of the operation will be reduced $60,000 a year if it is installed. The proposed machine costs $240,000 delivered and installed, and its economic life is estimated at 10 years, with zero salvage value. The company expects to earn 14 percent on its investment after taxes (14 percent is the firm’s cost of capital). The tax rate is 40 percent, and the firm uses straight-line depreciation. Any gain or loss on the machine is subject to tax at 40 percent.

Should Baltic buy the new machine?

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4- The Alpha Division of the Carlson Company manufactures product X at a variable cost of $40 per unit. Alpha Division’s fixed costs, which are sunk, are $20 per unit. The market price of X is $70 per unit. Beta Division of Carlson Company uses product X to make Y. The variable costs to convert X to Y are $20 per unit and the fixed costs, which are sunk, are $10 per unit. The product Y sells for $80 per unit.

Required:

a. What transfer price of X causes divisional managers to make decentralized decisions that maximize Carlson Company’s profit if each division is treated as a profit center?

b. Given the transfer price from part (a), what should the manager of the Beta Division do?

c. Suppose there is no market price for product X. What transfer price should be used for decentralized decision-making?

d. If there is no market for product X, is the operation of the Beta Division profitable?