Notes

Chapter 1

1.Mercator Minerals (2012).

2.Welch (2006).

3.We are assuming no further decline in customer traffic over the next several months.

4.Welch (2006).

Chapter 2

1.Sometimes these are referred to as “incremental” revenues and costs.

2.Unless, of course, the boxes were extremely large!

3.We are assuming that “other” expenses do not vary with the number of boxes sold.

4.Healy and Palepu (2003).

5.We are assuming the promotional expenses have already been incurred. The group may have set a budget of $300, but may decide how much to spend as the fundraiser draws nearer. Any portion that is unspent, but may be spent is avoidable; any portion that has been committed to, but cannot be recovered is unavoidable.

Chapter 3

1.Woo (2011).

2.Welch (2001).

3.Energy Information Administration (2011).

4.Dietz (2008).

5.Welsh (2011).

6.Peoples (2009).

Chapter 4

1.We should note that the positive correlation between labor hours and total product has its limits. Given the limited workspace, it is possible that too many workers would result in congestion and decrease total output. We will not consider that possibility because no firm would commit to hiring too many workers.

2.The fryer, proofer, glazing table, and re-furbishing expenses are also fixed costs. Because they are sunk and not relevant to any future decision, we will focus only on the monthly rent, as it is relevant to the decision as to whether to remain open for business each month.

3.We should note that the table only included the relevant revenue and cost for a year. If the relevant cost for a year exceeded the relevant revenue, Mary would need to consider the useful life of the second fryer in her analysis. To make the analysis as simple as possible, we will assume a useful life of one year with no salvage value.

Chapter 5

1.Long-lived assets are depreciated over their expected useful lives. This depreciation is used to spread an expense over the periods in which a company will receive benefits from the purchase. The depreciation does not accurately relate to changes in fair value, often leading to book values that differ significantly from fair values.

2.Although the accounting and decision making are similar for service, retailers, and manufacturing firms, we limit our discussion to the manufacturing setting because the discussion of accounting practices is easier to extrapolate from manufacturing firms to the others than vice versa.

3.GAAP does allow companies to decrease the value of assets if their perceived value declines below their book value. However, companies are not allowed to increase the book values, unless substantial repairs or improvements have been made.

4.Lewis (2010).

5.Litman (2011).

6.A rule that requires the comparison of average costs to marginal costs is not very useful if marginal costs are unknown. However, Chapter 4 described the relationships between costs. From that discussion, we know that average costs are increasing when they are less than marginal costs. Similarly, average costs decrease when they are higher than marginal costs. Thus, the rule can be reinterpreted as being “allocate costs when average costs are increasing, not when they are decreasing.”

7.Factory administration expenses are included in overhead; however, corporate-level administration expenses are not.

8.Hughes & Paulson Gjerde (2003).

9.Ittner, Lanen, & Larcker (2002).

Chapter 6

1.Aeppel (2007).

2.See Marburger (2012a) for a comprehensive discussion of innovative pricing strategies. Additionally, Marburger (2012b) provides insights on the factors that determine market power and proactive strategies to maintain one’s position in the marketplace.

3.Worthy (1987).

4.As an example, see the hourly doughnut shop problem discussed in Tables 4.8 and 4.9 in Chapter 4.