NTN Company\'s market for the Model 55 has changed significantly, and NTN has ha
ID: 2718792 • Letter: N
Question
NTN Company's market for the Model 55 has changed significantly, and NTN has had to drop the price per unit from $265 to $125. There are some units in the work in process inventory that have costs of $150 per unit associated with them. NTN could sell these units in their current state for $100 each. It will cost NTN $10 per unit to complete these units so that they can be sold for $125 each.
3.
A new employee looks at the analysis and exclaims, “We'll lose money with either of these alternatives! Let's just throw these units in the trash!” Suppose the alternative to trashing is choosing the more profitable of the two alternatives (that the new employee looked at and did not like). What effect will the trashing option (that the new employee
wants) have on net income?
A)
Net income will increase by $35 per unit for each unit discarded.
B)
Net income will decrease by $115 per unit for each unit discarded.
C)
It will have no effect on net income.
D)
Net income will decrease by $100 per unit for each unit discarded.
4.
When the incremental revenues and expenses are analyzed, the company is better off by
A)
$15 per unit if they complete the units.
B)
$25 per unit if they sell the units in their current state.
C)
$10 per unit if they sell the units in their current state.
D)
$125 per unit if they complete the units.
Use the following information to answer questions 7-8:
The EconoPrice Hotel has 200 rooms. Each room rents at $110 per night and variable costs total $27 per room per night of occupancy. Fixed costs total $76,000 per month.
7.
If the hotel spends an additional $20,000 in the month of February on advertising they feel that they can expect occupancy rate to increase by 10%. What would be the financial impact of spending this additional money on advertising for the month of February (28 days)?
A)
Total fixed costs will increase by $10,500.
B)
Net income will increase by $16,320.
C)
Net income will increase by $26,480.
D)
Total fixed costs will remain the same.
8.
If 75% of the rooms are occupied each night in the month of February (28 days) what will total costs be for the month?
A)
$189,400
B)
$173,600.
C)
$197,400
D)
$155,680.
Use the following information to answer questions 7-8:
The EconoPrice Hotel has 200 rooms. Each room rents at $110 per night and variable costs total $27 per room per night of occupancy. Fixed costs total $76,000 per month.
7.
If the hotel spends an additional $20,000 in the month of February on advertising they feel that they can expect occupancy rate to increase by 10%. What would be the financial impact of spending this additional money on advertising for the month of February (28 days)?
A)
Total fixed costs will increase by $10,500.
B)
Net income will increase by $16,320.
C)
Net income will increase by $26,480.
D)
Total fixed costs will remain the same.
8.
If 75% of the rooms are occupied each night in the month of February (28 days) what will total costs be for the month?
A)
$189,400
B)
$173,600.
C)
$197,400
D)
$155,680.
Use the following information to answer questions 7-8:
The EconoPrice Hotel has 200 rooms. Each room rents at $110 per night and variable costs total $27 per room per night of occupancy. Fixed costs total $76,000 per month.
7.
If the hotel spends an additional $20,000 in the month of February on advertising they feel that they can expect occupancy rate to increase by 10%. What would be the financial impact of spending this additional money on advertising for the month of February (28 days)?
A)
Total fixed costs will increase by $10,500.
B)
Net income will increase by $16,320.
C)
Net income will increase by $26,480.
D)
Total fixed costs will remain the same.
8.
If 75% of the rooms are occupied each night in the month of February (28 days) what will total costs be for the month?
A)
$189,400
B)
$173,600.
C)
$197,400
D)
$155,680.
Use the following information to answer questions 7-8:
The EconoPrice Hotel has 200 rooms. Each room rents at $110 per night and variable costs total $27 per room per night of occupancy. Fixed costs total $76,000 per month.
7.
If the hotel spends an additional $20,000 in the month of February on advertising they feel that they can expect occupancy rate to increase by 10%. What would be the financial impact of spending this additional money on advertising for the month of February (28 days)?
A)
Total fixed costs will increase by $10,500.
B)
Net income will increase by $16,320.
C)
Net income will increase by $26,480.
D)
Total fixed costs will remain the same.
8.
If 75% of the rooms are occupied each night in the month of February (28 days) what will total costs be for the month?
A)
$189,400
B)
$173,600.
C)
$197,400
D)
$155,680.
3.
A new employee looks at the analysis and exclaims, “We'll lose money with either of these alternatives! Let's just throw these units in the trash!” Suppose the alternative to trashing is choosing the more profitable of the two alternatives (that the new employee looked at and did not like). What effect will the trashing option (that the new employee
wants) have on net income?
A)
Net income will increase by $35 per unit for each unit discarded.
B)
Net income will decrease by $115 per unit for each unit discarded.
C)
It will have no effect on net income.
D)
Net income will decrease by $100 per unit for each unit discarded.
Explanation / Answer
3. Option C is correct.
In calculating Net income, a company has to consider only costs pertaining in making sold goods and not include the inventory goods. That's the reason we call these costs as Costs of Goods sold (COGS). So net income has no effect from this activity.
4. If the company is selling these units in the current state, there is a loss of 100 - 150 = -50
If the company sells after finishing these units by putting in additional 10, loss = 125 - (150+10) = -35
So if the company sells units once they are complete, they are better off by $15 per unit
So option A is correct.
7. Lets assume that initial occupancy rate was 50%
So each day 100 rooms are occupied
So revenue per day = 100 * 110 = 11000
Variable cost = 100 * 27 = 2700
Net income for the month = (11000 - 2700) * 28 - 76000 = 156400
Now company spends 20000 for 10% increase in occupancy rate i.e. to 60%
So each day 120 rooms are occupied
So revenue per day = 120 * 110 = 13200
Variable cost = 120 * 27 = 3240
Net income for the month = (13200 - 3240) * 28 - 76000 - 20000 = 182880
So increase in net income = 182880 - 156400 = $26,480
Option C
8. If each day 75% is the occupancy rate
So 150 rooms are occupied
Variable cost = 150 * 27 = 4050
Total cost = 4050 * 28 + 20000 = $189,400
So option A is correct
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