Question

Question 1: Mary Hartwell and Jane Jamail, college roommates, are considering the joint purchase of a computer that they can share to prepare class assignments. Ms. Hartwell wants a particular model that costs $2,000. Ms. Jamail prefers a more economical model that costs $1,500. In fact, Ms. Jamail is adamant about her position, refusing to contribute more than $750 toward the purchase. If Ms. Hartwell is also adamant about her position, should she accept Ms. Jamail's $750 offer and apply that amount toward the purchase of the more expensive computer? Question 2: Setting the sales price is easy: Enter cost information and desired profit data into one of the cost-volume-profit formulas, and the appropriate sales price can be computed mathematically. Do you agree with this line of reasoning? Explain. Question 3: Why are the terms direct cost and indirect cost independent of the terms fixed cost and variable cost? Give examples to illustrate.

Answer 1

1. Since both Mary Hartwell and Jane Jamail are adamant of their decisions, we have got constraints. If both the computers deliver same performance/behavior for preparing class assignments, then there is no point in spending unnecessarily on the model that Hartwell prefers. Hence both have to contribute an equal share of purchase cost or else chances that Hartwell assumes she has more right over the computer than Jane is likely.

2. Cost Volume Profit Analysis are useful for studying the changes in the operating profits at different levels of Volume of sale/production or different amount of costs. it is used to study the break even figures of sales. CVP does not help in determining the sales price. There are other models such as Cost-based model, Market Price based model, Portfolio based model. Sale price is impacted by several internals and external factors too. Its determination is usually not easy. Hence, I do not agree with the given statement.

3. The term direct costs and indirect costs are independent of Variable and fixed costs for the following reasons:

• All variable costs are usually direct costs ie traceable against the unit of product plus vary as per the units produced and all direct costs need not necessarily be variable costs.
• Some costs are direct and fixed ie, traceable against a unit of product but overall sum remains constant regardless of the number of units.
• Some costs may be indirect and fixed ie, not traceable against a unit of product plus the overall sum remains constant regardless of the number of units.
• Very rarely, indirect costs can be indirect too ie, they vary based on units produced however thy cannot be traces easily against units produced.