EXERCISE 2-13 (15 MINUTES)

4. a. Yes, the president may expect a minimum price of $153, which is the

average cost to manufacture one set. He might expect a price even

higher than this to cover a portion of the administrative costs as well.

The brother-in-law probably is thinking of cost as including only direct

materials, or, at most, direct materials and direct labor. Direct mate-

rials alone would be only $47 per set, and direct materials and direct

labor would be only $106.

b. The term is opportunity cost. The full, regular price of a set might be

appropriate here, since the company is operating at full capacity, and

this is the amount that must be given up (benefit forgone) to sell a

set to the brother-in-law.

Problem 2-26 (60 minutes)