28 Jun John Diaz owns Pacific-Electric
John Diaz owns Pacific-Electric, a large electrical contracting firm that provides services to building construction projects. The company has 2,000 employees and operates in three western states. Recently the company experienced large losses due to a downturn in the economy and a slowdown in construction. John thinks the losses were particularly large because this company has too much fixed cost. Expand on John’s thought. How are the large losses related to fixed costs? Identity a way that John can turn potential fixed costs into variable costs.
Mansard Hotels has five luxury hotels located in Boston, New York, Chicago, San Francisco, and Los Angeles. For internal reporting purposes, each hotel has an income statement showing its revenue and direct expenses. Additionally, the company allocates to each hotel a share of general administrative and advertising costs (e.g. salary of the company president, salary of the company CFO, hotel chain advertising, etc.) based on relative revenue. Explain in detail why the allocation of general administrative and advertising costs to the specific hotels is potentially useful or potentially harmful.
Consider a company that manufactures and sells personal computers (let’s call the company Bell Computers). Recently the company lowered its prices dramatically. The company is very efficient and needs only five days of inventory, collects its receivables within 30 days, and has suppliers who are willing to wait 59 days for payment. A competitor commenting on the aggressive pricing stated, “We’re in a commodity business, and a price war in a commodity business is really dumb.” Discuss the competitor’s comment that lowering prices is a dumb move by Bell Computers.
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