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# 1. Golf Specialties (GS) a.

Although it is estimated that GS will profit 90 euros per week from selling the 100 head covers to Kojo at 2.00 euros, GS should consider many other factors before accepting the offer. First, GS should ensure that Kojo will continue to purchase and distribute the head covers to ensure a steady income. They should also make sure that Kojo doesnt sell to other distributors or violate discussing pricing with the competition. Lastly, GS should consult with its legal team and management team to discuss all facets of this transaction (Zimmerman, 2011).

b. GSs weekly fixed cost of producing the 100 tiger head covers is 110 euros.

Sales Revenue (weekly): 500 units x 4.25 = 2,125 euros Incremental Revenue (weekly): 100 units x 2.00 = Total Cost of Sales (weekly): 600 units x 3.10 = 1,860 euros Total Cost of Sales (weekly): 500 units x 3.50 = 1,750 euros Incremental Cost (weekly) of 100 units = Incremental Profit (weekly) of 100 units = 110 euros 90 euros 200 euros

c. Other factors that GS should consider before making a decision to accept Kojos offer are to check into the legality of the price drop compared to the prices given to other distributors selling the head covers, make certain that this lower price doesnt affect or lower the cost sold to other distributors, look into the cost of plant utilization to see if these costs drive down their profits, and ensure that it doesnt hurt other sales if the offer is rejected (Zimmerman, 2011).

2. Montana Pen Company a. If Montana Pen outsources 400 gold clips for pen style no. 872 to the Chinese firm, they will lose \$64 U.S. per month. Below is the justification:

## 1,200 gold clips (manuf. by Montana Pen) x \$5.29 =

\$ 6,348

400 gold clips (manuf. by Chinese firm) x \$3.89 = \$1,556 800 gold clips (manuf. by Montana Pen) x \$6.07 = \$4,856 Total cost per month by both Montana Pen and Chinese firm = \$6,412 Total loss per month if outsourced = \$64 U.S.

However, by manufacturing 400 less gold clips through outsourcing, Montana Pen can reduce their plant utilization and production overhead, which can lead to an increase in profits but doesnt show in the above equation. The low loss per month is insignificant compared to the number of different styles of pens and pencils that Montana Pen can focus on to grow their business where profits can be greater than the gold clips. For Montana Pen, outsourcing may be beneficial and needs to be looked into at greater lengths.

b. If Montana Pen does outsource with the Chinese firm, to produce 400 gold clips per month, additional information that should be sought after includes checking the firms references, financial status, and a thorough business investigation to check their reliability and credibility. Also, Montana Pen should ask to see an example of the firms gold clip to compare to their own gold clip to ensure the product is of equal high-quality (Zimmerman, 2011).

3. Negative Opportunity Costs Opportunity costs can be negative if the benefits are foregone, not the costs foregone. Therefore, if there is no benefit provided in all the alternative options, then there is negative or no opportunity cost. However, an opportunity that leads to negative utility will never be considered thus it will not be foregone and cannot be measured as an opportunity cost. An opportunity cost that is thought to be negative is simply referred to as a cost incurred (Glaser, 2012).

4. J.P. Max Department Stores - Home appliances space: 1,000 sq. ft. x (\$72 - \$7) = Home appliance annual profits = \$65,000 \$64,000

## Annual difference in leasing to jewelry co. vs. appliance profits = \$1,000

- Televisions space: 1,200 sq. ft. x (\$72 - \$7) = Television annual profits =

\$74,400 \$82,000

## Annual difference in leasing to jewelry co. vs. television profits = -\$7,600

The department that should be leased, based on above figures, is the appliance space. If they utilized the television space, J.P Max stands to lose \$7,600 annually. At \$72 sq. ft. minus \$7 for fixed occupancy cost, J.P. Max will gain \$1,000 per year by leasing the 1,000 sq. ft. to the outside jewelry company over annual appliance profits in the same space. However, because there is a cost to move the appliance department out and remodel the space for the jewelry company, J.P. Max may lose profits the first year compared to keeping the appliance department. Since it is a small margin of profits for one year, J.P. Max should consider increasing its marginal cost through the increase in appliance sales by applying new sales and marketing techniques to increase profits, instead of leasing the space to the jewelry company. J.P. Max could also consider collecting a sales percentage from jewelry profits, which is a variable to increase profits.

5. Home Auto Parts - Three (3) items for display: Sale Price Unit Cost x Proj. Weekly Vol. = Net Profit Texcan Oil: Windshield Wiper Blades: Floor Mats: \$.69 \$9.99 \$22.99 \$.62 \$7.99 x x x 5,000 200 70 = \$350 = \$400 = \$385

\$17.99

*Potential display replacement: Armadillo Car Wax w/FREE 50 cans \$2.90 \$2.50 x 800 = \$320

## \$2.90 x 50 = \$145 + \$320 = \$465

Based on the above data, Home Auto Parts should not substitute the Armadillo Car Wax for one of the three planned promotion displays because the net profits from the car wax does not exceed the three original products for display. However, if Armadillo does decide to sweeten the offer by giving Home Auto Parts 50 free units of car wax, the net profits of the car wax exceeds all three products and could substitute one of the three original products for display, as long as no products had been purchased or any contracts have been established between Home Auto Parts and the three companies.