Individual Assignment for Cost

Fast Track MBA

Fall 2004

Edward L. Millner

Honor Policy

This assignment is ‘pledged’ and ‘open book’. You may use computers, calculators, notes and books while completing the assignment. With one exception, you may not talk with anyone about the assignment. You may discuss the assignment with the instructor. You are not allowed under any circumstances to discuss the assignment with other members of the class or to receive any assistance from them in any way.

Failure to abide by these guidelines constitutes an honor offense. If detected, the instructor will recommend that violators receive an “F” for the course.

Answer the following questions.

  1. Complete the following table. Assume that w = 10, r = 25 and P = 20.

L / K / Q / FC / VC / TC / AFC / AVC / ATC / MC
0 / 8 / 0
10 / 8 / 10
20 / 8 / 25
30 / 8 / 36
40 / 8 / 40
  1. Suppose that a firm operates two divisions, each division produces a different product, C = 100 - .5 Q1Q2 + Q12 + Q22, Q1 = Q2 = 10, that costs have been allocated evenly between the two products, and that the division producing Q2 shows a loss of $20 per year. An investor has offered to purchase the unprofitable division for $150. Using a discount rate of 10% and an infinite time horizon, would you recommend accepting the offer or not? Explain why or why not.

  1. Universal Shipping operates a tanker that carries goods between the US and Japan. The tanker has left Japan carrying a full cargo to the US. A potential customer has contacted Universal and wants to negotiate a price for carrying cargo on the return trip to Japan. Universal is sending a negotiator to meet with the potential customer. The negotiator can determine the maximum price the potential customer is willing to pay and is authorized to sign contract on behalf of Universal if this price is acceptable. The negotiator needs to know minimum price that Universal would accept. Some facts follow.
  • Since the US runs a large trade deficit with Japan, Universal has trouble finding customers for the return trips and often returns to Japan with no cargo.
  • Universal anticipates that the tanker will return to Japan empty unless it agrees to a contract with the potential customer.
  • The potential customer’s cargo will use ½ of the tanker’s capacity for cargo.
  • The fixed cost of owning the ship for the time required to make a round trip across the Pacific Ocean and back again is $200,000.
  • The variable cost of making a one-way trip full with cargo, including docking and (un)loading charges, is $53,000.
  • The variable cost of making a one-way trip with no cargo, including docking charges, is $40,000.
  • The variable cost of making a one-way trip with ½ of the ship’s cargo filled, including docking and (un)loading charges, is $46,000.
  • The total revenue paid by customers for the cargo shipped to the US is $295,000.

Assuming that the potential buyer is offering the maximum it is willing to pay, what is the lowest price that Universal should be willing to accept? Explain why. If you need more information, state the information needed and how you would use it.