Questions For Critical Thinking 4

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Questions for Critical Thinking 4
Salvatore’s Chapter 8:

a. Discussion Questions: 2 and 10.

2. (a) What is the distinction between marginal cost and incremental cost? (b) How are sunk costs treated in managerial decision making? Why?

(a) Maringal cost is the change in total costs or in total variable costs per unit change in output (Salvatore, 2012, pg. 718). The main reason to determine marginal cost is to gain understanding and knowledge of when a company reaches economics of scale. However, incremental cost is the total increase in costs from implementing a particular managerial decision (Salvatore, 2012, pg. 716). These costs are a broader concept and they ultimately refer to the change in total costs from implementing a
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The fixed costs for the plane are $3,000 per day whether it flies or not. (a) Should the airline replace its night flight from Los Angeles with a morning flight? (b) Should the airline remain in business?

(a) Option 1: Evening flight from LA to NY. Afternoon flight back to LA next day.
Revenue from LA to NY = 80 x $200 = $16,000
Revenue from NY to LA = 50 x $200 = $10,000
Total Revenue = $16,000 + $10,000 = $26,000
Total Cost = Fixed cost + Operating cost + Overnight charges
Total Cost = $3,000 + $11,000 x 2 + $1,200 = $26,200.
Total Profit = Revenue – Cost → $26,000 - $26,200 = -$200
Conclusion: Airway Express will lose $200 if they choose Option 1

Option 2: Replacing night flight from LA to a morning flight. Revenue from LA to NY = 70 x $200 = $14,000 Revenue from NY to LA = 50 x $ 200 = $ 10,000 Total Revenue = $ 14,000 + $ 10,000 = $ 24,000 Total Cost = Fixed cost + Operating cost Total Cost = $ 3000 + $ 11,000 x 2 = $ 25,000 Total Profit = Revenue – Cost→ $ 24,000 - $ 25,000 = ($ 1,000) Conclusion: Airway Express will lsoe $1,000 if they choose Option 2.
Therefore, based on the breakdown of the options above, Airway Express should not replace a night flight from LA to a morning flight because they risk losing $1,000, as opposed to $200.

11. The Goldberg-Scheinman Publishing Company is publishing a new managerial economics text for which it has estimated the following total fixed and average variable costs:

Total fixed costs:

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