Drugs-R-Us, Inc., produces equipment for manufacturing drugs. The costs of manufacturing and marketing this equipment at the company's normal volume of 3,000 units per month are shown in Exhibit 1.

                                                          EXHIBIT 1 - Costs per Unit for Equipment

Unit manufacturing costs:

            Variable materials                                        $200

            Variable labor                                                 300

            Variable overhead                                        150

            Fixed overhead                                             240

                       Total unit manufacturing costs                                 $   890

Unit marketing costs:

            Variable                                                        $100

            Fixed                                                            280

                       Total unit marketing costs                                        $   380

Total unit costs                                                                                $1,270

The following questions refer only to the data given above. Unless otherwise stated, assume there is no connection between the situations described in the questions; each is to be treated independently. Unless otherwise stated, a regular selling price of $1,580 per unit should be assumed. Ignore income taxes and other costs that are not mentioned in Exhibit 1 or in the question.

1.   Market research estimates that monthly equipment production could be increased to 3,500 units which is well within production capacity limitations, if the price were cut from $1,580 to $1,400 per unit. Assuming the cost behavior patterns implied by the data in Exhibit 1 are correct, would you recommend that this action be taken? What would be the impact on monthly sales, costs, and income?

Fixed costs change when producing unit change? I'm confused with the total fixed costs after the change.

2.   Drugs-R-Us has an opportunity to enter a foreign market in which price competition is keen. An attraction of the foreign market is that demand there is greatest when demand in the domestic market is quite low; thus, idle production facilities could be used without affecting domestic business. Unlike many foreign markets there are no government restrictions. An order for 1,000 units is being sought at a below-normal price in order to enter this market. Additional shipping and handling costs for this order will amount to $150 per unit, while the cost of obtaining the contract (marketing costs) will be $8,000 in addition to the normal variable marketing costs. Domestic business would be unaffected by this order. What is the minimum (e.g. breakeven) unit price Drugs-R-Us should consider for this order of 1,000 units?

How can I fill out the Relevant???

How can I distinguish between relevant cost and irrelevant cost?

3.   An inventory of 230 units of equipment remains in the stockroom. These must be sold through regular channels at reduced prices or the inventory will soon be valueless. What is the minimum price that would be acceptable for selling these units?

Zero Coupon Bond Price Calculate the price of a zero coupon bond that matures in 9 years if the market interest rate is 8 percent. Assume semi-annual interest payments and $1,000 par value. (Round your answer to 2 decimal places.)

Multiple Choice

• $920.00

• $500.25

• $493.63

• $1,000.00

The current price of a non-dividend-paying stock is $32.59 and you expect the stock price to either go up by a factor of 1.397 or down by a factor of 0.716 over the next 0.7 years.

A European put option on the stock has a strike price of $33 and expires in 0.7 years. The risk-free rate is 3% (annual, continuously compounded).

Part 1. What is the option payoff if the stock price goes down?

Part 2. What is the risk-neutral probability of an up movement?

Part 3. What is the value of the option?

The current price of a non-dividend-paying stock is $266.72 and you expect the stock price to be either $293.39 or $242.47 after 0.5 years. A European call option on the stock has a strike price of $270 and expires in 0.5 years. The risk-free rate is 3% (EAR).

Part 1. What is the hedge ratio (delta)?

Part 2. How much money do you need to invest in riskless bonds to create a portfolio that replicates the payoff from one call option? Enter any amount borrowed as a negative number.

Part 3. What should be the price (premium) of the call option?

QUESTION TWO

A. In what situations should the transfer price be the external market price? (10 Marks)

B. How should the transfer price be established when there are diseconomies of scale and prices have to be lowered to increase sales volume? (10 Marks)

C. What is the ideal transfer price? (5 Marks)

D. In what circumstances should the transfer price be standard variable cost plus opportunity cost of making the transfer? (10 Marks)

E. Discuss the advantages and disadvantages of Market Price Based Transfer Prices and Cost Based Transfer Prices. Further, outline the main variants that exist under each method. (15 Marks)

When price elasticity of demand is equal to unity, a small decrease in price:

increases total revenue.

decreases total revenue.

has no effect on revenues.

raises marginal revenue.

If the market price were equal to the equilibrium price, who would receive the most consumer surplus from their purchase of a webcam?

If the price level in Japan increases more rapidly than the price level in Britain, we would expect

Select one:

Japanese productivity to have increased more rapidly than British productivity.

the British pound to depreciate against the Japanese yen.

the Japanese yen to depreciate against the British pound.

interest rates in Japan to be lower than interest rates in Britain.