Exam 6: Differential Analysis: the Key to Decision Making

Cybil Baunt just inherited a 1958 Chevy Impala from her late Aunt Joop. Aunt Joop purchased the car 40 years ago for $8,000. Cybil is either going to sell the car for $10,000 or have it restored and then sell it for $22,000. The restoration will cost $9,000. Cybil would be financially better off by:

Janeiro Skate, Inc. currently manufactures the wheels that it uses for its in-line skates. The annual costs to manufacture the 150,000 wheels needed each year are as follows: Total Cost Direct materials \ 165,000 Direct labor 45,000 Variable manufacturing overhead 60,000 Fixed manufacturing overhead 300,000 Total \ 570,000 Kasba Rubber Company has offered to provide Janeiro with all of its annual wheel needs for $3.50 per wheel. If Janeiro accepts this offer, 75% of the fixed manufacturing overhead above could be totally eliminated. Also, Janeiro would be able to rent out the freed up space and could generate $72,000 of income annually. Assume that direct labor is a variable cost. Required: Based on this information, would Janeiro be financially better off to continue making the wheels or to buy them from Kasba?

A joint product is:

The Bharu Violin Corporation has the capacity to manufacture and sell 5,000 violins each year but is currently only manufacturing and selling 4,800. The following data relate to annual operations at 4,800 units: Woolgar Symphony Orchestra is interested in purchasing Bharu's excess capacity of 200 units but only if they can get the violins for $350 each. This special order would not affect regular sales or the total fixed costs. Assume that Bharu is manufacturing and selling at capacity (5,000 units). Any special order will mean a loss of regular sales. Under these conditions if the special order from Woolgar Symphony Orchestra is accepted, the financial advantage (disadvantage) Bharu for the year should be:

It may be a good decision to replace an asset before its original cost has been fully recovered through increased revenues or decreased costs.

A customer has asked Lalka Corporation to supply 3,000 units of product H60, with some modifications, for $34.70 each. The normal selling price of this product is $46.35 each. The normal unit product cost of product H60 is computed as follows: Direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like some modifications made to product H60 that would increase the variable costs by $3.80 per unit and that would require a one-time investment of $24,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order. Required: Determine the financial advantage or disadvantage of accepting the special order. Show your work!

Younes Inc. manufactures industrial components. One of its products, which is used in the construction of industrial air conditioners, is known as P06. Data concerning this product are given below: The above per unit data are based on annual production of 4,000 units of the component. Assume that direct labor is a variable cost. What is the current contribution margin per unit for component P06 based on its selling price of $220 and its annual production of 4,000 units?

When a company has a production constraint, the product with the lowest contribution margin per unit of the constrained resource should usually be given highest priority.

Mae Refiners, Inc., processes sugar cane that it purchases from farmers. Sugar cane is processed in batches. A batch of sugar cane costs $60 to buy from farmers and $13 to crush in the company's plant. Two intermediate products, cane fiber and cane juice, emerge from the crushing process. The cane fiber can be sold as is for $29 or processed further for $13 to make the end product industrial fiber that is sold for $61. The cane juice can be sold as is for $40 or processed further for $28 to make the end product molasses that is sold for $67. What is the financial advantage (disadvantage) for the company from processing one batch of sugar cane into the end products industrial fiber and molasses rather than not processing that batch at all?

Landor Appliance Corporation makes and sells electric fans. Each fan regularly sells for $42. The following cost data per fan is based on a full capacity of 150,000 fans produced each period. A special order has been received by Landor for a sale of 25,000 fans to an overseas customer. The only selling costs that would be incurred on this order would be $4 per fan for shipping. Landor is now selling 120,000 fans through regular channels each period. Assume that direct labor is an avoidable cost in this decision. What should Landor use as a minimum selling price per fan in negotiating a price for this special order?

The Melville Corporation produces a single product called a Pong. Melville has the capacity to produce 60,000 Pongs each year. If Melville produces at capacity, the per unit costs to produce and sell one Pong are as follows: The regular selling price for one Pong is $80. A special order has been received by Melville from Mowen Corporation to purchase 6,000 Pongs next year. If this special order is accepted, the variable selling expense will be reduced by 75%. However, Melville will have to purchase a specialized machine to engrave the Mowen name on each Pong in the special order. This machine will cost $9,000 and it will have no use after the special order is filled. The total fixed manufacturing overhead and selling expenses would be unaffected by this special order. Assume that direct labor is a variable cost. Assume Melville anticipates selling only 50,000 units of Pong to regular customers next year. At what selling price for the 6,000 special order units would Melville be financially indifferent between accepting or rejecting the special order from Mowen?

Product U23N has been considered a drag on profits at Jinkerson Corporation for some time and management is considering discontinuing the product altogether. Data from the company's budget for the upcoming year appear below: In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $144,000 of the fixed manufacturing expenses and $93,000 of the fixed selling and administrative expenses are avoidable if product U23N is discontinued. The financial advantage (disadvantage) for the company of eliminating this product for the upcoming year would be:

Future costs that do not differ between the alternatives in a decision are avoidable costs.

Hamby Corporation is preparing a bid for a special order that would require 780 liters of material W34C. The company already has 640 liters of this raw material in stock that originally cost $8.30 per liter. Material W34C is used in the company's main product and is replenished on a periodic basis. The resale value of the existing stock of the material is $7.60 per liter. New stocks of the material can be readily purchased for $8.35 per liter. What is the relevant cost of the 780 liters of the raw material when deciding how much to bid on the special order?

The Carter Corporation makes products A and B in a joint process from a single input, R. During a typical production run, 50,000 units of R yield 20,000 units of A and 30,000 units of B at the split-off point. Joint production costs total $90,000 per production run. The unit selling price for A is $4.00 and for B is $3.80 at the split-off point. However, B can be processed further at a total cost of $60,000 and then sold for $7.00 per unit. If product B is processed beyond the split-off point, the financial advantage (disadvantage) as compared to selling B at the split-off point would be:

The constraint at Pickrel Corporation is time on a particular machine. The company makes three products that use this machine. Data concerning those products appear below: Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized. (Round your intermediate calculations to 2 decimal places.)

In a decision to drop a product, the product should be charged for rent in proportion to the space it occupies even if the space has no alternative use and the rental payment is unavoidable.

Gottshall Inc. makes a range of products. The company's predetermined overhead rate is $19 per direct labor-hour, which was calculated using the following budgeted data: Component P0 is used in one of the company's products. The unit cost of the component according to the company's cost accounting system is determined as follows: Direct materials \ 21.00 Direct labor 40.80 Manufacturing overhead applied 32.30 Unit product cost \ 94.10 An outside supplier has offered to supply component P0 for $78 each. The outside supplier is known for quality and reliability. Assume that direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by this decision. Gottshall chronically has idle capacity. Required: Is the offer from the outside supplier financially attractive? Why?

The Carter Corporation makes products A and B in a joint process from a single input, R. During a typical production run, 50,000 units of R yield 20,000 units of A and 30,000 units of B at the split-off point. Joint production costs total $90,000 per production run. The unit selling price for A is $4.00 and for B is $3.80 at the split-off point. However, B can be processed further at a total cost of $60,000 and then sold for $7.00 per unit. In a decision between selling B at the split-off point or processing B further, which of the following items is not relevant:

WP Corporation produces products X, Y, and Z from a single raw material input in a joint production process. Budgeted data for the next month is as follows: The cost of the joint raw material input is $149,000. Which of the products should be processed beyond the split-off point?