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Hi John,
I hope you’re alright.
I saw the below question from a fellow student under the above lecture and it perfectly summed up what I wanted to ask so I’m just going to copy and paste it:
In part a), it says that Rooks fixed costs are $18,000 but of those, $5,000 are direct fixed costs which could be saved if production ceased. That leaves $10,000 fixed costs that are still being incurred regardless of Rooks not being produced.
Thus, in part b), if crowners incur extra direct fixed costs of $6,000, shouldn’t we take into consideration as well those $10,000 fixed costs? How are those $10,000 fixed costs left treated then?Many thanks!
If we stop producing Rooks, then the specific fixed costs of $5,000 will not be incurred but the remaining $13,000 (I don’t know where you get $10,000 from) will still be incurred. (So total fixed costs for the business will be $50,000 instead of $55,000)
In part (b), yes we do take into account the extra $6,000 fixed costs (and I do so in the lecture!). (And the total fixed costs for the business will be $56,000).
The question does not ask what the profit will be, it asks for the decision.
You can take either of two approaches:Either work out the total profit in each case – if it increases then good, if it falls then bad. Alternatively, just look at what the change in the profit will be – if there is extra profit then good, if there is less profit then bad.
It is the second approach that I take in the lecture (and in the printed answer) because it is faster and much more efficient.
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