Management Services Part 2 by Luzviminda S.

Payongayong
Y2007 edition

CHAPTER 4 - DIFFERENTIAL COST ANALYSIS

PROBLEMS

4.1
a CM lost for eliminating Wise P50,000 - P26,000 = 24,000.00
Cost avoided - the direct fixed costs 19,000.00
Net CM lost from Wise 5,000.00
Increase in CM from the increase in sales of Bud
(P70,000 - P32,000) x 20% = 7,600.00
Net increase CM by eliminating Wise 2,600.00
b Decision: Eliminate Wise because Total net income will increase by P2,600

4.2 CM lost 6,000.00

Cost avoided:
Direct labor 200.00
Rental 100.00 300.00
Net CM lost 5,700.00
Less, Increase in CM from the increase in sales of Peanuts:
Sales P10,000 x 40% 4,000.00
Variable costs (P2,500 + P 2,000) x 40% 1,800.00
CM 2,200.00
Net CM lost if Soybeans is eliminated 3,500.00

4.3
1 Selling price 41.00
Less, Variable costs:
(P7 + P30 + P3 ) 40.00
Net increase in revenues 1.00

2 Cost to manufacture : Variable costs 40.00

Fixed costs unavoided 4.00
44.00
Cost if purchased outside: Purchase price 38.00
Fixed cost unavoided 4.00
42.00
Yes, purchase outside because of savings, P2.00 per unit

4.4
Special order price per unit 20.00
Variable cost to manufacture 16.00
Net (CM) income per unit 4.00
Accept the order

4.5
a Special order price per unit 40.00
Variable cost to manufacture 35.00
Net CM per unit 5.00
total number of units 5,000
Total CM 25,000.00
Less, Total shipping costs 2,000.00
Net increase in income 23,000.00

b Accept

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Y2007 edition

4.6
a Variable cost of goods sold P980,000 x .80 / 25,000 = 31.36
Variable operating costs P170,000 x .70 / 25,000 = 4.76
Total variablecost per unit 36.12
Special order price 40.00
CM per unit 3.88
Total number of units 500
Total 1,940.00
Less, Shipping costs 800.00
Net increase in income 1,140.00

b accept

4.7
Total cost to make 88,000.00
Total cost to buy:
Purchase price 80,000.00
Fixed costs unavoided 12,000.00
Total 92,000.00
Less, opportunity cost (CM from other product) 5,000.00 87,000.00
Net advantage to buy 1,000.00

4.8
a Relevant cost Relevant cost
to make to buy
Direct materials 1.50
Direct labor 1.80
Variable overhead (1.80 x 30%) 0.54
Purchase price 4.00
3.84 4.00
Number of units 200,000 200,000
Total relevant costs 768,000.00 800,000.00
Net advantage to make 32,000.00

b make

4.9
Selling price if process further 25.00
Selling price if sell as is 21.00
Incremental selling price 4.00
Incremental cost of processing further
(P1.00 + P.25 + P1.00) 2.25
Net increase in income 1.75

Process further

4.10 Total cost to Total cost to Diff in income

Retain Replace increase (decrease)
Total cost savings
P55,000 x 4 years - 220,000.00 220,000.00
Cost of new machine - (240,000.00) (240,000.00)
Scrap value of old equipment - 24,000.00 24,000.00
Net savings - 4,000.00 4,000.00
Replace the old machine by the new machine

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Y2007 edition

4.11 Total cost to Total cost to Diff in income

Retain Replace increase (decrease)
Total cost savings
(P3,000- P2,000) x 4 years - (4,000.00) 4,000.00
Cost of new machine - 24,000.00 (24,000.00)
Scrap value of old equipment (4,000.00) - 4,000.00
Net savings (4,000.00) 20,000.00 (16,000.00)
Retaine the old machine

4.12
a Sales of Division B 300,000.00
Less, Variable cost of Div B
COGS P200,000 x 80% = 160,000.00
S & A P120,000 x 20% = 24,000.00 184,000.00
Contribution margin 116,000.00
Less, Direct fixed costs avoided:
COGS 30,000.00
S&A 30,000.00 60,000.00
Net Direct CM of Div. B - positive 56,000.00
RETAIN Div B.
b Total income Total income
With Div B W/out Div B
Sales 700,000.00 400,000.00
Cost of goods sold 350,000.00 160,000.00
Gross Profit 350,000.00 240,000.00
Selling and Adm expense 320,000.00 266,000.00
Net income 30,000.00 (26,000.00)
Retain Div B, decrease in net income of P56,000 if eliminated.

4.13
Sales of Southern Division 300,000.00
Less, Variable cost of Div B
COGS P200,000 x 80% = 160,000.00
OE P120,000 x 70% = 84,000.00 244,000.00
Contribution margin 56,000.00
Less, Direct fixed costs avoided:
COGS FC = P200,000 x 20% = 40,000.00
S & A FC = P120,000 x 30% + 36,000.00
Total Fixed costs 76,000.00
Percentage of FC that can be eliminated 40% 30,400.00
Net Direct CM of Div. B - positive 25,600.00
RETAIN Southern Division.
Total income Total income
With Southern W/out Southern
Sales 1,300,000.00 1,000,000.00
Cost of goods sold 850,000.00 674,000.00
Gross Profit 450,000.00 326,000.00
Selling and Adm expense 220,000.00 121,600.00
Net income 230,000.00 204,400.00
Decrease in total net income 25,600.00

Decrease in total net income if Souther Division is eliminated. Retain the division
4.14 Product 22 Product 44
CM per unit 7.50 25.00
MH required to produce one unit 15 minutes 75 minutes
or .25 hour 1.25 hour

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Y2007 edition

CM per machine hour 30.00 20.00

Ranking first second
produce only Product 22
To prove: Assume all hours will be used for each 4,000 hours 4,000 hours
Total units produced 16,000 3,200
CM per unit 7.50 25.00
Total CM 120,000.00 80,000.00
OR CM per machine hours x number of hours

4.15 Standard Deluxe

CM per unit 20.00 45.00
MH required to produce one unit 1.60 3.00
CM per machine hour 12.50 15.00
Ranking first second
produce only De luxe
To prove: Assume all hours will be used for each 1,200 hours 1,200 hours
Total CM (CM per mh x total number of hours available) 15,000.00 18,000.00

4.16
a Incremental cost to make + opportunity cost
P15 + P40 + P10 + (P50,000 / 4,000) = 77.50

b Relevant Cost to make Variable costs P65 x 4,000 = 260,000.00

Rental income 50,000.00 310,000.00
Cost to buy: Purchase price per unit P80 x 4,000 = 320,000.00
Net advantage to make (10,000.00)

c Relevant Cost to make Variable costs P65 x 4,000 = 260,000.00

Rental income 50,000.00
Avoidable fixed costs 30,000.00
total 340,000.00

Cost to buy: Purchase price per unit P80 x 4,000 = 320,000.00

Net advantage to buy 20,000.00

4.17
a Sales 110,000 x P15 1,650,000.00
Variable cost 110,000 x P5.55 610,500.00
Contribution margin 1,039,500.00
Fixed costs P450,000 + P210,000 660,000.00
Operating income 379,500.00

b Full cost to manufacture 7.50

Profit per unit 0.25
Bid price 7.75
Less, Variable costs P1 + P2 + P1.50 4.50
CM per unit 3.25
Number of units 40,000.00
Total increase in CM 130,000.00

c-1 Special order price 15.00

Variablecosts P1 + P3 + P1.50 + P1.05 6.55
Contribution margin 8.45
units 40,000
Total increase in CM 338,000.00
Less, Fixed costs 60,000.00
Net increase in Operating income 278,000.00
c-2 Both orders can be accepted even if the increased costs of P40,000 for labor and P60,000
for fixed costs overhead are assigned to government orders.

4.18
1 Five years together

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Y2007 edition

To keep To replace Difference

Cash operating costs 22,500.00 12,500.00 10,000.00
Old machine (book value: -
Depreciation 5,000.00 5,000.00
lumpsum write-off 5,000.00 (5,000.00)
Disposal value (2,000.00) 2,000.00
New machine: Acquisition cost 10,000.00 (10,000.00)
Total cost 27,500.00 25,500.00 2,000.00
The difference in total costs over the five years is P2,000 in favor of replacement.

2 The loss on disposal of the old machine combines the lump-sum write-off (an irrelevant item) with the
disposal value ( a relevant item), P5,000 - P2,000 = P3,000 loss on disposal. Because of the
inclusion of an irrelevant iten, this amount does not affect the computation in requirement 1. It is
best to keep the lump-sum write off and the disposal value separate.

4.19
1 The only relevant item is the P300 to be received for the calendars. Profit will be P300 higher if the
the offer is accepted than if it is rejected.
2 The P800 is called a sunk cost, that will not be affected by the decision.

4.20 Sell at splitt Process

off point further Difference
Revenues, 2,500,000 gals. At P.30 / at P.38 750,000.00 950,000.00 200,000.00
Separable costs beyond split-off - 235,000.00 235,000.00
Income 750,000.00 715,000.00 (35,000.00)
To sell at split-off point.

4.21 Make Purchase

1 Direct materials 300,000.00
Avoidable overhead costs:
Indirect labor 30,000.00
Supplies 20,000.00
Allocated occupancy costs -
Purchase cost 345,000.00
Total relevant costs 350,000.00 345,000.00
Advantage to purchase of P5,000

2 On some occassions, qualitative factors may be used as the deciding factor rather than the
quantitative factor, especially if the difference in amount is insignificant. A small company may not
be reliable with respect to the assurance of supply or delivery. Sometimes, the company may be
willing to invest in order to have control over the supply of the components. The division manager
may have made the right decision for the wrong reason. He incorrectly ignored avoidable fixed costs,
leading to a mistaken belief that making the components was less costly by P.45 per unit or
P45,000 in total. The P50,000 avoidable fixed costs makes the puchase option less costly by P5,000
If the manager's decision is to make the component, it should be because forgoing profits of P5,000
has a long-run qualitative benefit of more than P5,000, not because the bid is greater than the
variable cost.

4.22
1 Revenues with united airlines personnel (P50 x 50) 2,500.00
Revenues without united airlines personnel (P100 x 50) 5,000.00
The opportunity cost here is the revenue of P5,000, because in its strict sense, the variable
cost of servicing the room is identical.

2 On December 28, the opportunity cost dwould be P800 (10 x P80)

3 Let X = % of occupancy
Then P90X = P50
X = P50 / P90 = 55.56%

Or using the indifference point. To be indifferent, Sheraton would have to generate the same rent

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Y2007 edition

as the United Airlines contract which is P50 x 50 x 365 days = P912,500

Let Y = number of rooms per day at P90
P90(Y)365 = P912,500
P32,850Y = P912,500
Y = 27.777 rooms per day
Percentage of occupancy of the 50 rooms = 27.77 / 50 = .5555 or 55.56%
To check: P90 x .556(50) x 365 days = P912,573

4.23 Without With the

1 the contract contract
Contribution margin
(200 rooms x 365 days )(P83 - P8) (.85) 4,653,750.00
(200 - 40 ) (365) (P83 - P8) (.95) 4,161,000.00
(40) (365) (P48 - P8) 584,000.00
Total contribution margin 4,653,750.00 4,745,000.00
Net advantage to accept the contract 91,250.00

2 Le X = contribution margin per room

(40)(365)(X) + P4,161,000 = P4,653,750
14,600 X = P492,750
X = P33.75
Lowest room rate = P33.75 + P8 = P41.75

4.24 Total number of

1 Percent of total Dresses Capes Handbags
Complete sets 0.70 1,050 1,050 1,050
Dress and cape 0.06 90 90
Dress and handbag 0.15 225 225
Dress only 0.09 135
Total units if accessories
are introduced 1.00 1,500 1,140 1,275
Unit sales if accessories are
are not introduced 1,250 - -
Incremental Sales in units 250 1,140 1,275
Incremental contribution margin per unit 600.00 40.00 20.00
Total contribution margin 150,000.00 45,600.00 25,500.00
Total contribution margin 221,100.00
Less, Additional costs:
Additional cutting cost (1,500 x P36) 54,000.00
Additional material cost (250 x P250) 62,500.00
Lost remant sales (1,250 x P25) 31,250.00
Incremental cutting for extra dresses (250 x P100) 25,000.00 172,750.00
Total Incremental profit 48,350.00

2 Nonquantitative factors that could influence management in its decision to manufacture matching
capes and handbags include:
accuracy of forecasted increase in dress sales
accuracy of forecasted product mix
company image from dress manufacturer only to a more extensive supplier of women's apparel
competition from other manufacturers of women's apparel
whether there is adequate capacity (labor, facilities, storage, etc.)

4.25

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Y2007 edition

1 The salesman's analysis is faulty because it includes depreciation on the old equipment, which is
irrelevant. Moreover, both the total and unit costs are based on an annual volume of 40,000 units,
which may not necessarily be accurate.

2 new machine old machine

Units 20,000 20,000
variable costs 80,000.00 120,000.00
straight line depreciation 50,000.00 -
total costs 130,000.00 120,000.00
unit cost 6.50 6.00

3 Let X = Number of units

P50,000 + P4X = P6 X
X = 25,000 units

4.26
B-1 B-2
CM per unit 10.00 12.00
Hours required per unit 2 hours 3 hours
CM per hour 5.00 4.00
Ranking first second
Market limit 150 units 100 units
Units produced 150 units 50 units
hours used 300 hours 150 hours

4.27
Direct CM lost from Gifts
Sales 50,000.00
Less direct costs:
COGS 40,000.00
Selling Exp at 15% 7,500.00 47,500.00
Decrease in Net income 2,500.00

4.28
CM lost 8,000 x P6 48,000.00
Avoidable Fixed costs 50,000.00
Increase in Net income (2,000.00)
Cost avoided is greater than CM earned therefore, increase in net income.

4.29 present if buy

situation outside
1 Sales 10,000 x P50 500,000.00 5,000 x P50 250,000.00
less, variable costs
cost of ridges 3 x 10,000 x P10 300,000.00 3 x 5,000 x P8 120,000.00
cost of assembly 10000 x P10 100,000.00 5,000 x P10 50,000.00
400,000.00 170,000.00
Contribution margin 100,000.00 80,000.00
Decrease in net income if manufacture (20,000.00)

2 If buy new factory

Sales 10,000 x P50 500,000.00
less, variable costs
cost of ridges 3 x 10,000 x P6 180,000.00
cost of assembly 10000 x P10 100,000.00
280,000.00
Contribution margin 220,000.00
Increase in net income if manufacture 120,000.00
4.30
A B C
CM lost 2,000.00 1,500.00 1,000.00

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Y2007 edition

Direct costs avoided 2,500.00 1,000.00 2,000.00

Increase (Decrease) in net income 500.00 (500.00) 1,000.00
Product B must be dropped

4.31
Special order selling price 1000 x P17 17,000.00
Less, relevant cost of special order
Variable cost 1000 x P12 12,000.00
Selling & Adm. Cost 1000 x P2 2,000.00
14,000.00
Increase in net income 3,000.00

4.32
bings bangs bongs
CM per unit 5.00 8.00 11.00
hours required per unit 6 minutes 10 minutes 15 minutes
CM per hour 50.00 46.00 44.00
Ranking first second third
Market limit 800 units 800 units 800 units
Units to be produced/best comb. 800 units 720 units -
hours used 80 hours 120 hours none

4.33
a shut down costs
Reduced fixed costs P30,000 x 4 months 120,000.00
additional cost during shut down period 25,000.00
Restarting costs 20,000.00
165,000.00

b Shut down savings

Regular fixed costs P50000 x 4 months 200,000.00
less shut down savings 165,000.00
35,000.00
c Shut down point
SDP = SDS divided by New CM
P35,000 / (P40 - 30) in units 3,500.00

4.34
a shut down costs
Reduced fixed costs 60% x P200,000 x 6 months 720,000.00
additional cost during shut down period 100,000.00
Restarting costs 50,000.00
870,000.00

b Shut down savings

Regular fixed costs P200,000 x 6 months 1,200,000.00
less shut down costs 870,000.00

shut down savings 330,000.00

c Shut down point
SDP = SDS divided by New CM
P330,000 / (P45 - 25) in units 16,500.00

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advise: If demand is greater than 16,500 continue because loss

to continue is smaller than if shut down

If demand is less than 16,500 discontinue because loss

to continue is bigger than if shut down

If demand is equal to 16,500 either, because loss would be the same

4.35
Incremental selling price if to accept the order (15,000 x P11) 165,000.00
Incremental variable costs:
Variable manufacturing costs at P9 per unit (15,000 x P9) 135,000.00
Additional packaging and shipping costs 3,800.00
Total 138,800.00
Net incremental profit from the special order 26,200.00

4.36
Product 1 Product 2 Product 3
CM per unit 5.00 8.00 11.00
Hours required per unit ( in minutes) 6 10 15
Units produced per hour (60 min. / time required) 10 6 4
CM per hour 50.00 48.00 44.00
Ranking 1st 2nd 3rd

1 Produce only Product 1, to maximize profit.

2 To Prove 200 200 200

Units produced 2,000 1,200 800
Total CM per product 10,000.00 9,600.00 8,800.00

3 Hourly contribution margin of Product 1 50.00

Divided by Number of Product 2 per hour 6.00
Required unit CM of Product 2 8.33
Add Variable cost of Product 2 8.00
Required selling price of Product 2 16.33
Present selling price of Product 2 16.00
Required increase in selling price of Product 2 0.33

4.37
Total cost to make the part:
Materials 1.50
Direct labor 2.00
Variable overhead 0.50
4.00
Total cost to buy 5.00
Net advantage to make on a per unit basis (1.00)
DECISION: Make the part

4.38
Retailers Wholesalers
Number of customers called per week 60 35
Average order per customer, at their respective prices 180 400

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Y2007 edition

Average weekly sales per sales person 10,800.00 14,000.00

Variable costs 60% of sales price ; 75% of sales price 6,480.00 10,500.00
Weekly contribution margin from calling on customers 4,320.00 3,500.00
Ranking 1st 2nd
Concentrate on Retailers

4.39
1 Sales 10,000 x 12 x P12 1,440,000.00
Less, Expenses:
Direct materials 3.90
Direct labor 0.60
Overhead 1.70
Selling 4.10
total units of 10,000 x 12 x P10.30 10.30 1,236,000.00
Operating income or 10,000 x 12 x (12-10.30) 204,000.00

2 Sales 10,000 x 12 x 120% x P11 1,584,000.00

Less, Variable expenses:
(P3.90 +P.60 + P.80 + P3) (144,000) 1,195,200.00
Contribution margin 388,800.00
Less, Fixed expenses : (P.90 + P1.10) (120,000) 240,000.00
Operating income 148,800.00

3 Cost to obtain order P6,000 / 5,000 1.20

Direct materials 3.90
Direct labor 0.60
Variable overhead 0.80
Variable selling expenses: P3 x 60% 1.80
Minimum price for special order 8.30

4 The variable selling expenses only 3.00

4.40
1 Cost saved by purchasing boxes of tubes:
Material, 20% x P3.00 0.60
Labor, 10% x P3.50 0.35
Overhead, 10% x P.50 * 0.05
Total cost to make 1.00
total cost to buy 1.05

* Total overhead P1.50 per box, allocated overhead P1.00 per box (100,000 / 100,000)
Variable overhead P.50 per box.
The company should make the tubes.

2 The company would not pay more than P1.00 each because that is the cost to make the
product internally.

3 At volume of 125,000 boxes, the company should buy the tubes.

Cost to buy the tubes 125,000 x 1.05 131,250.00
Cost to make the tubes

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(125,000 x P1.00) + added fixed costs of P10,000 135,000.00

Net savings to buy the tubes (3,750.00)

Making the tubes saves variable costs of P.05 per box. If sales exceed P10,000 / P.05 = 200,000
at 200,000 boxes, it is cheaper to make the tubes.

4 The company needs 125,000 boxes. The cost to buy 125,000 boxes is P131,250. The cost to make
100,000 and buy 25,000 is:
Cost ot make 100,000 boxes at P1.00 100,000.00
Cost of buying 25,000 boxes at P1.05 26,250.00
Total 126,250.00
Therefore, the company should the latter action, which saves P5,000

5 There are many nonquantifiable factors, such as: Quality of the tubes, reliability of delivery to meet
production schedules; the financial stability of the supplier; development of an alternate source of
supply; alternate uses of tube manufacturing capacity; long-run character and size of the market.

4.41
1 Total profit expected
volume Profit per unit total profit
Back bag 8,000 50.00 400,000.00
Body bag 3,000 120.00 360,000.00
School bag 4,000 60.00 240,000.00
1,000,000.00

2 Decrease in CM if scholl bag is dropped 4,000 x( P600-360) 960,000.00

3 Decrease in CM if back bag is dropped 8,000 x (P120-40) 640,000.00

Increase in sales of school bag (7,000 - 4,000) x (P600 -P360) 720,000.00
Net increase in profit 80,000.00

4 Relevant cost to make the part 45.00

Relevant cost to buy the part 60.00
Savings in making the part 15.00
Number of units needed 4,000.00
Total 60,000.00
less increase in fixed costs 35,000.00
Net savings in making the part - increase in profit 25,000.00

5 Sales price of the special order (P245 x 1,000 ) 245,000.00

Variable cost of the special order (P160 x 1,000 ) 160,000.00
Increase in profit 85,000.00

6 Incremental CM of the special order (P245-160) x 1,500 127,500.00

less CM lost from the 500 units sold to regular customers
(P400 - P160) x 500 120,000.00
Net increase in net profit 7,500.00

4.42

1 Eliminate or Retain a product

CM loss from selling Product X 200.00
Avoidable cost if Product X is dropped 80.00

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Incremental loss (CM lost is higher than avoidable cost) 120.00

Total profit before dropping Product X 280.00
Total profit if Product X will be dropped 160.00

2 Retain or Replace a product

Desired Incremental profit to offset the incremental profit loss
if Product X is dropped 120.00
Avoidable cost for Product P 130.00
Total CM by Product P to achieve the same profit with Product X 250.00
Total CM per unit of Product P P7.00 - P5.00) 2.00
Required number of units to be sold (P250 / 2.00) 125.00

3 Accept or reject a special offer

Incremental sales from the offer P8.00 x 40 units 320.00
Incremental variable cost [(P400 / (P800/P10)] x 40 (200.00)
Incremental CM from the special offer 120.00
CM Lost from regular customer * (P400/80) x 10 units (50.00)
Net incremental CM from the special offer 70.00
Total Net income before the offer 280.00
Total Net income if the offer is accepted 350.00
*Capacity is 110, regular sales is 80 available excess is 30
Special offer is 40; 10 units taken from regular customers

4 Sell as is or process further

Product X Product Y Product Z Totals
Sales if process further 300.00 500.00 800.00 1,600.00
Sales if sell as at split of pointis 110.00 220.00 230.00 560.00
Incremental sales if processed further 190.00 280.00 570.00 1,040.00
Incremental cost if processed further -
Variable costs 100.00 200.00 400.00 700.00
Avoidable fixed costs 80.00 100.00 120.00 300.00
Total 180.00 300.00 520.00 1,000.00
Increase(Decrease) in income 10.00 (20.00) 50.00 40.00
Product Y must be sold at split off point

5 As per total there will be an incremental income of P40 if the only option is to sell all as is
or to process further all products; therefore, process all.

6 Limited or scarce resources (Product combination)

a Product X Product Z
Total CM a 200.00 400.00
Units sold b 100 200
CM per units c (a / b) 2.00 2.00
Units produced per hr. d 5 8
CM per hour e (c x d) 10.00 16.00
Ranking second first
Market limit - -
products produced 100 hours 500.00 800.00
Since the company can sell all it can produce, to maximize profit,
the company must produce Product Z only

b Assume that only 45 maximum hours are available to produce the most profitable product:
Hours available 45
Units produced ( 8 units per hour) 360
Total CM from sale of Product Z at P2.00 per unit 720.00

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Total DCM lost from not producing Product X (P200 - P80) (120.00)
Total CM from Product Z 600.00
Present Total CM from Product Z 400.00
Net incremental CM from the decision to produce only Product Z 200.00

4.43 The P8 million is already gone. It is irrelevant for decision purposes. The relevant comparison is
whether to invest P4 million in the division or to invest it elsewhere.
sell division hold the division
Investment required P4 million P4 million
Income generated ? P500,000 yearly*
* this assumes that the division has truly "turned around" and will now make a net profit of P500,000
per year for the foreseeable future. The P4 million is relevant because Elgin is forgoing the opportunity
to invest it elsewhere for some return. If projects of comparable risk can be expected to generate
more than P500,000 yearly, the division should be sold.

4.44

Without With
1 discount discount
Revenues, 75 at P.12 9.00
Revenues:
72 at P.12 8.64
6 at P.072 0.43
9.00 9.07

Note that a minor (4%) gain in passengers will be beneficial. Note, too, that airlines have negligible
variable costs of adding a few passengers in otherwise empty seat.
2 Let X = number of passengers who switch
Revenue with discount = Revenue without discount
50(.60)(P.12) = X(P.12)
P3.60 = P.12X
X = P3.60 / P.12 = 30 passengers
To Check: Without With
discount discount
Revenues, 75 at P.12 9.00
Revenues:
(75 - 30) at P.12 5.40
50 at P.072 3.60
9.00 9.00
Therefore, if at least 21 of the 50 discount passengers are "new", that is, they would not have flown
without the discount, there is more revenue with the discount plan.

13 Chapter 4 - Differential Cost Analysis (1) Sheet 2

Management Services Part 2 by Luzviminda S. Payongayong
Y2007 edition

14 Chapter 4 - Differential Cost Analysis (1) Sheet 2