Charlie reflected for a few minutes on his decision to move out of the basement to his present location. "I know I could probably charge a lower selling price, but I'm sharp enough to figure out that a ten or twenty dollar reduction in the sales price has the same impact as a corresponding increase in variable costs. But what about those dang fixed costs? I moved over here because my wife got sick of me tracking sawdust all over the place, and there is a little more room here. I doubt I could find anything less expensive than this, but it seems as though I'm paying that $390 in rent when I could just use the space in my basement that I was using before. I could get one of those fancy dust collecting units which would keep the dust out of the house. Even with depreciation on the dust collector, my fixed costs would be nowhere near what they are now. Insurance might drop a bit, and our household utility bill might go up a couple of bucks. What would happen if I just moved back home?"

Required: What happens if Charlie move back to the basement? Assume that the dust collector costs $600 [installed], and that his total utilities costs associated with the shop drop to $2.00 per month. [The fixed cost of utilities would be eliminated.] Insurance decreases to $10.00 per month. Assume straight line depreciation on the dust collector over 5 years. Assume that he also eliminates the commission and reduces the sales price to $295.00 each. Now what happens?

Answer

Copyright © 2004 Gerald M. Myers. All rights reserved. This site has been developed as aid to instructors and students in managerial accounting. The scenarios contained herein are not intended to reflect effective or ineffective handling of managerial situations. Any resemblance to existing organizations is purely coincidental.

Last modified: August 03, 2005