A Company Is Deciding If It Should Design an Advertising

question 19

Essay

A company is deciding if it should design an advertising system for use on Twitter©. The first option is to skip out on designing, with no net costs or gains. The second option is System A, which would result in additional sales of either $50,000 under good conditions or $10,000 under bad conditions. The final choice is System B, which would increase sales by $20,000 under both good and bad conditions. Suppose that good conditions are twice as likely as bad conditions. Which option should the company pursue if developing a system costs $25,000?

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Definitions:

Variable Overhead

Costs that fluctuate with the level of production or service delivery, such as utilities or raw materials.

Total Overhead Variance

The difference between the actual overhead incurred and the standard overhead allocated for the actual production achieved.

Labor Price Variance

The difference between the actual cost of direct labor and the standard cost, reflecting the variance in wages paid.

Direct Material Cost

The cost of raw materials and components that are directly used in the production of a product.