Running head: Question Set 4
Module 4: Critical Thinking 4
Arlena Gillespie
Liberty University
Salvatore’s Chapter 8
Problem 3 Should the airline replace its night flight from LA w/ a morning flight Should
the airline remain in business?
Total CostTC = overnight 1200+11000(2) 1200+22000+30$26,200
charge +300000
+operating cost +
fixed cost
Total Revenue80*200 +50*20016000+10000$26,000
Total ProfitTP=TR-TC26,000-26,200-$200
DQ 10 What are the aim, usefulness, and shortcomings of a) cost-volume-profit analysis
and b) the concept of operating leverage?
Cost-volume-profit analysis examines the relationship among the total revenue, total
costs, and total profits of the firm at various output levels. Often the analysis is used by
executives to determine the required sales volume for the break-even levels. The cost-volume-
profit analysis analyzes the effect of changing conditions in the firm. An additional advantage is
the ability to forecast the quantity that it must sell in order to earn a set profit.
Conversely, the cost-volume-profit analysis is based on specific data in single variations.
For companies with a mixture of products that tend to change over time, the cost-volume-profit
analysis presents a difficult challenge of allocating the fixed cost among the various products.
The analysis also has the limitation of being applicable only when there is an assumption of
constant prices and the average variable cost are held.
Operating leverage is the ratio of the firm’s total fixed costs to total variable costs. The
higher the operating leverage, then the company profit has more in sales’ volume. As long as the
cost to produce more sales does not increase, a company profits from having a higher leverage as
the profit margin increases. However, the higher the operating leverage, the higher the breakeven
point for a firm with a higher profit margin. As a firm has more leverage with larger profits,
losses occur sooner and arise more rapidly which presents a greater risk.
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DQ 2 Marginal Cost versus incremental cost? How are sunk costs treated in managerial
decision making? Why?
There is a close relation when discussing production cost between incremental cost and
marginal cost. Incremental cost is a broader concept that refers to the change in total cost from
implementing particular management decisions. Meanwhile, marginal cost only refers to the
change in total cost for 1-unit change in output. Both costs involve the changes in total cost.
Incremental is associated with decision whereas, marginal cost considers additional output. Sunk
costs are not affected by the decision. In managerial decision making, sunk cost are irrelevant
because they are not affected.
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Total CostTC = operating 11000(2)+300022000+3000$25,000
cost + fixed cost
Total Revenue70*200+50*20014000+10000$24,000
Total ProfitTR-TC24000-25000-$1,000
Both flights incur losses however the overnight flight loss of -$200 is less than the morning
flight loss of -$1,000. Therefore the airline should keep the overnight flight.
Yes the airline should remain in business by continuing to provide the flight between LA
and New York. As the average revenue is greater than the average cost, the over night flight
is still profitable rather than replacing it with a morning flight.
Problem 11 Determine the breakeven output and total sales revenues and draw the cost-
volume-profit chart, and determine the ouput that would generate a total profit of $60,000
and the total sales revenue that output level; do not draw the chart,
TC =TFC + TVC TC=TFC+(AVC)(Q)TR=(P)(Q)AVC =TVC/Q
AFC =TFC/QATC=TC/Q=AFC +AVC
TFC = 100,000AVC= 20P=30
QB = TFCTFC100,000= 10,000QB = 10,000
P - AVCP - AVC30-20
TR = (P)(Q)(P)(Q)(30)(10000)= 300,000TR = $300,000
QT = TFC + TTFC + T100,000+60,000160,000=16,000QT =
P - P - AVC30-201016,000
AVC
TR = (P)(Q)(P)(Q)(30)(16000)= 480,000TR = $480,000
Chapter 8 Spreadsheet Problem In Excel File
Problems 7 From Figure 9-4, determine the effect of a 33% import tariff on commodity X.
In reference to Figure 9-4, the equilibrium price is $5, when domestic customers purchase
400 of commodity X. Therefore from 600 to 500 purchase of commodity X, domestic
consumption will decrease. From the quantity of 200 to 300 purchases of Commodity X will rise
for imports. On the other hand for government tariff revenue, it falls from 400 to 200 in
purchases of Commodity X. (1*200)=200
Salvatore Chapter 9
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Problem 11 Publishers pay authors a percentage of the revenue from book sales. Explain
the conflict that this creates between publishers and authors.
The conflict between authors and sellers is over the rights of the book. The author is
responsible for the content of the book which could correlate a demand for the authors’ inclusion
in the sale of the book. On the other hand, the publisher feels they own the rights of the demand
which is responsible for sale of the book with the publication to the target market. Due to a
publisher’s extent of publication carrying sole responsibility for providing the book to the market
on a larger scale of readers and interest in the content, the publisher should have control of the
book.
Chapter 9 Spreadsheet Problem In Excel File
Froeb
9-3 Snack, Beer, and Marijuana
Which side would you think that California beer distributors were on? Snack food
vendors? Why?
California beer distributors are possibly against the legalization of marijuana as they may
see marijuana as a complement of a direct substitute of snack food versus beer. By legalizing
marijuana, beer distributors may view the complement of marijuana with snack food as a new
feature to the current competition of a substitute that can compete with the monopoly’s product
and erode the monopoly profit. Snack food would support the legalization of marijuana as a
complement to increase the sale of their products. Snack food vendors would support the
legalization of marijuana.
9-4 Competitive Industries
Are managers in more competitive industries more likely to spend their time on reducing
costs or on pricing strategies?
Managers in more competitive industries are more likely to spend their time reducing
costs rather than on pricing strategies. A competitive firm is not able affect the price, which is set
based on the market demand and competition. If the price is above marginal cost it sells more
and if the price is below marginal cost it sells less. Therefore, a competitive firm can apply effort
in trying to reduce costs.
11- 4 The Carry Trade
How does a decrease in U.S. interest rates affect the EU/U.S. exchange rates?
The decrease in the U.S interest rates is affected by a lower a rate of return on the EU/US
exchange rate. The U.S. dollar is impacted as it decreases in value, which decreases the demand
for the dollar. In addition to the decrease in the demand of the dollar, U.S. exports are also
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affected. U.S exports will be less attractive and less expensive as a result of the decrease in value
of the dollar which makes exports looker cheaper. The Carry trade is relative in the decrease in
U.S interest rates as foreign investors continue to borrow the dollars to sell and convert to the
foreign currency which in this case would be for the Euro. Therefore causing the dollar to
depreciate as there is an increase in the supply of dollars by selling dollars.
11-5 Dollar Devaluation
How will a dollar devaluation affect business and consumers in the twin cities of El Paso,
United Sates, and Juarez, Mexico?
In El Paso, United States, a dollar devaluation makes consumption and businesses in
Juarz, Mexico look cheaper as a substitute product for consumption and business in El Paso,
United States. As Mexico business is a substitute, there is a reduction in price and demand for
U.S. business which is measured in dollars. On the contrary, if there is a devaluation of the dollar,
the peso appears stronger. Therefore, the domestic supply would change in Juarez, Mexico. In
Juarez, Mexico, if there is a dollar devaluation, a peso will decrease in demand for Mexican
businesses and increase in demand for U.S. businesses. The dollar devaluation for El Paso,
United States will harm United States businesses and harm U.S. consumers. Whereas, the higher
the price helps Juarez, Mexico businesses but is considered to still be harmful to foreign
producers and benefit foreign consumers which would be Juarez, Mexico consumers.
