Homework – WEEK 1

1.1 What are the four steps in decision making?

Step 1: (G) – Goal(s) - Specify the decision problem, including the decision maker’s
goals.
Step 2: (O) – Options - Identify options.
Step 3: (A) – Analyze - Measure benefits (advantages) and costs (disadvantages) to
determine the value (benefits reaped less costs incurred) of each option.
Step 4: (C) – Choice - Make the decision, choosing the option with the highest value.

1.4 What is the opportunity cost of a decision option?

The opportunity cost of any decision option is the value to the decision maker of the
next best option.

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1.8 What are the stages of the planning and control cycle?

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The four stages of a planning and control cycle are Plan, Implement, Evaluate, and

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Revise (PIER).

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Step 1: (P) – Plan - Planning which products and services to offer, what resources to
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acquire, how much of each resource to acquire, and where to sell products and
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services.
Step 2: (I) – Interpret - determining how and when to use resources, as well as
setting performance standards to motivate employees to achieve the formulated
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plan.
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Step 3: (E) – Evaluate - measuring actual performance and understanding the

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reasons for any deviations between actual and planned results.

Step 4: (R) – Revise - beliefs about the best products and services to offer, the
appropriate types and amounts of resources, the feasibility of performance targets,
and the effective- ness of incentive schemes.
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1.10 Who are the primary users of financial accounting information? What types of
decisions do these people make?
 Outside the firm, such as shareholders, creditors, and taxing authorities.
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 Shareholders and potential investors use accounting data to determine

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whether they should buy or sell shares of a company’s stock.

 Similarly, banks use accounting data to determine whether they should lend
money to a firm and at what terms.
 Boards of directors, acting on behalf of shareholders, use accounting data to
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evaluate the performance of senior executives.

1.11 Who are the primary users of managerial accounting information? What types of
decisions do these people make?
 inside the firm.
 An organization’s employees use managerial accounting data to determine,
among other things, which products and services to offer, the prices of
products and services, what equipment to purchase, who to hire, and how
to pay them.

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 1.12 What are the key differences between financial and managerial accounting?

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1.35 Implementing the four-step framework (LO1).

Desiring to stay in shape this semester, you are debating between joining the fitness
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center at your university versus paying on a “per-use” basis. Joining the fitness center
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costs $80 for the semester, but you can use the facilities as often as you like at no
additional cost. Alternatively, you can pay on a per-use basis, with each visit costing $4.
You believe that you will use the fitness center once a week, or 16 times for the semester.
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Required:
a. What is your goal for this decision problem?
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 Minimize the cost

b. What are the options available to you?

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 Option A: Join the fitness

 Option B: “Per-use” basis

c. What is the cash outflow for the semester for each option?
 Option A: $80/semester
 Option B: $64/semester *assuming that I’ve been there 16 times

d. Based on your answer to part (c), what should you do?

 Only pay when I want to or pick the Option B— “per-use” basis

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 1.36 Implementing the four-step framework (LO1).
Angela runs a donut shop in a residential neighborhood in Houston. Currently, Angela sells
300 glazed donuts at $0.80 each, 250 jelly donuts at $1.20 each, and 200 chocolate donuts
at $1.00 each. On average, it costs Angela $0.40, $0.60, and $0.50 to make each glazed,
jelly, and chocolate donut, respectively. Lately, Angela has seen a surge in demand for her
jelly donuts. Angela is considering the following two options:
(1) Raise the price of her jelly donuts to $1.50 each – at this new price, Angela still expects
to sell 250 jelly donuts. The prices and demand for glazed and chocolate donuts would
remain unchanged.
(2) Keep the price of the jelly donuts at $1.20 – for this option, Angela believes she could
sell 100 more jelly donuts, but that the demand for chocolate donuts would be reduced by
an equal amount (i.e., 100 donuts). The price and demand for glazed donuts would remain
unchanged. Of course, Angela could always continue to do what she is doing now.

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Required:

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a. What is Angela’s goal in this decision problem?

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 Meet the demand/gain more revenue

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b. What are Angela’s options?
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 Option A: Raise the price of her jelly donuts to $1.50 each
 Option B: Keep the price of the jelly donuts at $1.20 each but sell more
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c. What is the cash flow associated with each option?

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Glazed Jelly Chocolate Profit

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Donuts Donuts Donuts

Price $0.80 $1.00 $1.20 370
Quantity 300 200 250
Original
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Revenue 240 200 300

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Cost 120 100 150

Price $0.80 $1.00 $1.50 445
Quantity 300 200 250
Option A
Revenue 240 200 375
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Cost 120 100 150

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Price $0.80 $1.00 $1.20 370

Quantity 300 100 350
Option B
Revenue 240 100 420
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Cost 120 60 210

Cost (each) $0.40 $0.60 $0.50

e. Based on your answer to part (c), what should Angela do?

 Option B

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 1.38 Calculating value, opportunity cost (LO1).
Rachel plans to visit St. Louis, Missouri for a one-day conference in the near future. Rachel
is considering two options:
Option 1— Fly into St. Louis the day before, rent a hotel room for overnight stay for one
night, and return immediately after the conference the next evening;
Option 2— Rent a car, drive to St. Louis the day before the conference, and drive back the
day after the conference. With Option 2, Rachel will have to spend two nights at the hotel
in St. Louis.

The following table provides Rachel’s estimated expenditures under the two options:

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Required:
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a. Based only on the expense items given, what is the cash outflow connected
with each option?
 Cost
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b. Based only on the expense items given, what is the opportunity cost of each
option?
Option 1 Option 2
Cost 1050 725
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Opportunity Cost 725 1050

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c. Based only on the expense items given, identify the option for which its value is
greater than its opportunity cost. Is this the option that Rachel should choose?
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Why or why not?

 Option A – But Rachel should not choose this one since it costs higher than
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the other option.

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d. Are there any other expenses or considerations that Rachel should take into
account in making this decision?

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 1.40 Identifying options, calculating value and opportunity cost (LO1).
Nick is a computer technician who works from his own home and charges $75 per hour. He
works 25 days a month for an average of 6 hours a day. Recently, a computer company
offered Nick a job with a monthly salary $7,500. If Nick accepts the job, he could still work
for two hours every evening (for 25 days per month) repairing computers; however, Nick
will reduce his fee from $75 per hour to $50 per hour if he accepts the job. Of course, Nick
can continue doing what he does and reject the offer.

Required:
a. Identify the three options that Nick faces.
 1) Stay with his current job
 2) Accept the new job
 3) Accept the new job in addition to still work on his current job

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b. Calculate the income from each option.

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Option 1 Option 2 Option 3

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Income 11,250 7,500 10,000

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c. Treating the income from each option as the value of that option, determine
the opportunity cost of each option.
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Option 1 Option 2 Option 3

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Income 11,250 7,500 10,000

Opportunity Cost
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d. Which option should Nick choose? How does the value of this option compare
with its opportunity cost?

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 1.43 Implementing the four-step framework (LO1).
Zap, Inc., manufactures and sells a broadleaf herbicide that kills unwanted grasses and
weeds. Via their television infomercials, Zap encourages homeowners to “take control of
their yards” by purchasing one of their “ZAP” kits. Each ZAP kit includes a 32-ounce bottle
of weed and grass killer concentrate and a 16-ounce bottle of poison ivy and tough brush
killer concentrate. Anticipating high sales, Zap produced 50,000 ZAP kits at a cost of $7.50
per kit. Unfortunately, Zap overestimated the demand for their product. After a year of
infomercials, the company had only sold 25,000 units at a price of $19.95 per unit. The
company is in a quandary about what to do with the remaining 25,000 units. Zap could
sell the remaining 25,000 units to a national home-improvement store for $7.00 a unit.
Alternatively, the company could sell the product via its Web site—under this option, Zap
believes they could sell 60% of the remaining units if they reduced the price to $9.95. (Any
remaining units would be thrown away). Finally, Zap has ruled out running additional
infomercials due to the high cost of TV advertising.

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Required:

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a. What is Zap’s decision problem, including its goals?

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 To fix the overestimated demand for their product (25,000 units)
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b. What are Zap’s options with respect to the 25,000 unsold ZAP kits?
 1) Sell the remaining 25,000 units to a national home-improvement store
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 2) Sell the products via its website

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c. What is the increase in cash flow associated with each of Zap’s options?
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d. What should Zap do with the remaining ZAP kits?

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 1.47 Planning and control cycle (LO3).
Dr. Sam “Smiley” Shapiro, DDS, has just graduated from a prestigious dental school in the
Western United States. He has asked for your assistance in classifying the following
actions/decisions within the context of the planning and control cycle: Plan, Implement,
Evaluate, and Revise.

2 Whether to hire two or three dental hygienists? Dr. Shapiro has narrowed his choices
to two or three hygienists based on expected patient volume.
 Planning
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3 Prepare a staffing schedule so that at least one hygienist is available during all times

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the office is open.

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 Implement

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

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4 Track the number of patients seen by each hygienist per week.
 Evaluate
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5 Reevaluate the adequacy of current staffing levels.

 Revise
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
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Required: Classify each decision according to its stage in the planning and control cycle.
Provide a brief rationale for each classification.
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