Question

Discussion Questions for Module 3: Question 1: A local bank advertises that it offers a free noninterest-bearing checking account if the depositor maintains a $500 minimum balance in the account. Is the checking account truly free? Question 2: The managers of Warren Inc. are suggesting that the company president eliminate one of the company's segments that is operating at a loss. Why may this be a hasty decision? Question 3: Budgets are useful only for small companies that can estimate sales with accuracy. Do you agree with this statement?

Answer 1

Question 1:

No, the checking account is not truly free. It has a cost

in the form of opportunity cost of the $500 kept as

minimum balance in the interest free checking account.

The opportunity cost is the income that the person

opening the account would earn if he invests the $500

in his chosen best alternative.

Question 2:

The segment may be making a positive contribution

margin and steps may be possible which will improve the

segment operating result.

Question 3:

No, I do not agree with the statement. Budgets are useful

for all companies, small or big. Accuracy of sales estimate

is not the determining factor. Sales need be estimated

only with reasonable accuracy as permitted by the

circumstances.