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Date Posted: 09:49:30 04/25/02 Thu
Author: Dr. D.
Subject: Error on Spring, 2001 sample final (#24)

The answer to question # 24 on the spring, 2001 exam appears to be incorrect. The answer posted is the answer you would get if you assumes that marginal costs are applied only to new sales (i.e. 50% of $5 million). It does not take into account that costs will decreased cost due to the $500,000 in cannibalized sales. The problem states that operating costs are 50% of sales - theefore, it seems reasonable that if sales of the oterh division go down, the operating costs attributable to those sales should also). If you make that assumption, marginal costs would be 50% of $4.5 million, or $2.25 million. This assumption would give you an answer of $1.64 million, rather than the $1.465 million answer listed.

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