CASE 1: As the manager of the foreign language division, he probably relied

on his marketing department for sales forecasts and on his legal department
for advice on contract and copyright law. The information he obtained about
future sales was indeed accurate, but apparently his legal department did not
fully anticipate all the legal ramifications of distributing Magicword.
Sometimes, managers are given misinformation.
The real problem in this case, however, is that Ralph did not properly act on
the information that was given him. Ralph’s plan was to generate $7 million
per year in sales by sinking $20 million into Magicword. Assuming there were
no other costs associated with the project, the projected net present value to
Amcott of purchasing Magicword was which means that Ralph should have
expected Amcott to lose over $1.6 million by purchasing Magicword.
Ralph was not fired because of the mistakes of his legal department but for
his managerial ineptness. The lawsuit publicized to Amcott’s shareholders,
among others, that Ralph was not properly processing information given to
him: He did not recognize the time value of money.
Cost of project $20,000,000
Future Cashflows
Year 1 7,000,000
Year 2 7,000,000
Year 3 7,000,000

Interest Rate 7%

PV 18,370,212
NPV= PV - C0 =$18,370,212 - $20,000000 = -$1,629,788

CASE 2: By spending $300,000 today on a new machine, the firm will reduce
costs by $365,000 over five years. However, the present value of the cost
savings is only $284,679.22.
Consequently, the net present value of the new machine is computed below:

Future Cash Flows

Year 1 50,000
Year 2 60,000
Year 3 75,000
Year 4 90,000
Year 5 90,000

Interest
8%
Rate

PV 284,679.22

NPV= PV =$284,679 - $$300,000 = -

- C0 $15,321
 Since the net present value of the machine is negative, the manager
should not purchase the machine. In other words, the manager could earn
more by investing the $300,000 at 8 percent than by spending the money on
the cost-saving technology.
CASE 3: Incremental revenue of $183,200 if you adopt the project. To earn
these additional revenue you must spend an additional $90,000 for drill
augers and $75,000 for additional temporary workers. The sum of these cost
is $165,000 represents the incremental cost of the new drilling project. Since
your incremental revenue of $183,200 is higher than the incremental cost of
$165,000, you should give your “thumbs up” to the new project that will add
$18,200 to your bottom line.

NEW DRILLING PROJECT

Current After New Incremental
Situation Drilling Project Revenue and Cost

Total Revenue 1,740,400 1,923,600 183,200

Variable Cost -
Drill augers 750,000 840,000 90,000
Temporary workers 500,000 575,000 75,000
Total Variable Cost 1,250,000 1,415,000 165,000
Direct Fixed Cost -
Depreciation-equipment 120,000 120,000 -
Total Direct Fixed Cost 120,000 120,000 -
Indirect Fixed Cost -
Supervisor's Salaries 240,000 240,000 -
Offi ce Supplies 30,000 30,000 -
Total Indirect Fixed Cost 270,000 270,000 -
Profit 100,400 118,600 18,200

CASE 4: Break Even Analysis

1. Contribution Margin 56 (revenue of 16 dollars per ticket less variable cost
of 10 dollars)
2. Contribution Margin ratio : 37.5 % (CM of 6 Dollars/Revenue of 16 Dollars)
3. 8,000 tickets
4. 128 dollars
5. 10, 000 tickets and 160 dollars

CASE 5:
15, 000 units needs to be produced

CASE 7
It would be unethical if it will affect the bonuses of the employee, especially, if
the they are showing excellent performance in the workplace.
CASE 8:
$750 favorable means variable costs are efficiently managed
CASE 9:
Cost of new street cleaner= $50.740
PV of Cost saving of purchase=$43,4674.49 (1.10)^-5x$70,000)
It is unfavorable to purchase since the present value of its cost savings less
than the purchase price controller’s decision and analysis is not correct
CASE 11:
Worldwide Airways must not accept the $150,000 per roungg trip of flight on a
jumbo jet because it will include loss of $40,000