Solution to Question 7

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7-17 Healthy Hearth has sufficient excess capacity to handle the one-time order for 1000 meals next month. Consequently, the analysis focuses on incremental revenues and costs:

|Incremental revenue per meal |$3.50 |
|Incremental cost per meal | 3.00 |
|Incremental CM per meal |$0.50 |
|Number of meals |1,000 |
|Increase in operating income |$ 500 |

7-18 This order will require 500 (= (10,000/100)*5) machine hours. Since
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Therefore, the optimal production level for each product is:

Deluxe: 8,000 sq. yards
Regular: 20,000 sq. yards (= 3,000 / 0.15)

7-22
Incremental variable costs = ($16 + 5 + 3) x 10,000 = $24 x 10,000 = $240,000

Incremental revenues = $40 x 10,000 = $400,000

Berry’s operating income will increase by $160,000 if it accepts this offer.

23. (a)

Incremental Revenue ($9 * 30,000) $270,000
Variable Costs of Order ($5.50^ * 30,000) (165,000)
Income Effect $105,000

Substitution Effect: Loss of Profits from 6,000 units @ $4.50 $(27,000)

Total increase in operating income $ 78,000

^ -- Variable cost per unit [pic]

Ritter must consider the long-run effect of displeasing its regular domestic customers by not fulfilling their demand.

(b)

Incremental Revenue ($9 * 30,000) $270,000

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