Exam 6: Differential Analysis: the Key to Decision Making

In a special order situation, any fixed cost associated with the order would be irrelevant.

Eliminating nonproductive processing time is particularly important in a bottleneck operation.

Ahrends Corporation makes 70,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: An outside supplier has offered to sell the company all of these parts it needs for $48.50 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $273,000 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $8.20 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products. What is the financial advantage (disadvantage) of purchasing the part rather than making it? (Round your intermediate calculations to 2 decimal places.)

Mcfarlain Corporation is presently making part U98 that is used in one of its products. A total of 7,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity: An outside supplier has offered to produce and sell the part to the company for $17.10 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company, none of which would be avoided if the part were purchased instead of produced internally. If management decides to buy part U98 from the outside supplier rather than to continue making the part, what would be the annual financial advantage (disadvantage)?

Which of the following would be relevant in the decision to sell or throw out obsolete inventory?

Priddy Corporation processes sugar cane in batches. The company purchases a batch of sugar cane for $62 from farmers and then crushes the cane in the company's plant at the cost of $18. Two intermediate products, cane fiber and cane juice, emerge from the crushing process. The cane fiber can be sold as is for $28 or processed further for $13 to make the end product industrial fiber that is sold for $36. The cane juice can be sold as is for $43 or processed further for $23 to make the end product molasses that is sold for $85. Which of the intermediate products should be processed further?

Bruce Corporation makes four products in a single facility. These products have the following unit product costs: Additional data concerning these products are listed below. The grinding machines are potentially the constraint in the production facility. A total of 9,000 minutes are available per month on these machines. Direct labor is a variable cost in this company. How many minutes of grinding machine time would be required to satisfy demand for all four products?

CoolAir Corporation manufactures portable window air conditioners. CoolAir has the capacity to manufacture and sell 80,000 air conditioners each year but is currently only manufacturing and selling 60,000. The following per unit numbers relate to annual operations at 60,000 units: The City of Clearwater would like to purchase 3,000 air conditioners from CoolAir but only if they can get them for $75 each. Variable selling and administrative costs on this special order will drop down to $2 per unit. This special order will not affect the 60,000 regular sales and it will not affect the total fixed costs. The annual financial advantage (disadvantage) for the company as a result of accepting this special order from the City of Clearwater should be:

The management of Furrow Corporation is considering dropping product L07E. 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 $186,000 of the fixed manufacturing expenses and $106,000 of the fixed selling and administrative expenses are avoidable if product L07E is discontinued. The financial advantage (disadvantage) for the company of eliminating this product for the upcoming year would be:

Danny Dolittle makes crafts in his spare time and always sells everything he makes at local craft shows. Danny specializes in four products. Because Danny's time is limited before the next craft show, he is trying to decide how to use his time to the best advantage. Information related to the four products that Danny produces are shown below: Rank the products from the most profitable to the least profitable use of the constrained resource.

The Draper Corporation is considering dropping its Doombug toy due to continuing losses. Data on the toy for the past year follow: If the toy were discontinued, Draper could avoid $8,000 per year in fixed costs. The remainder of the fixed costs are not avoidable. Assuming all other conditions stay the same, at what level of annual sales of Doombugs (in units) should Draper be indifferent between discontinuing Doombugs or continuing the production and sale of Doombugs?

The most recent monthly income statement for Benner Stores is given below: Due to its poor showing, consideration is being given to closing Store B. Studies show that if Store B is closed, one-fourth of its traceable fixed expenses will continue unchanged. The studies also show that closing Store B would result in a 10 percent decrease in sales in Store A. The company allocates common fixed expenses to the stores on the basis of sales dollars. Required: Determine the monthly financial advantage (disadvantage) of closing Store B.

Ouzts Corporation is considering Alternative A and Alternative B. Costs associated with the alternatives are listed below: What is the financial advantage (disadvantage) of Alternative B over Alternative A?

The following information relates to next year's projected operating results of the Children's Division of Grunge Clothing Corporation: If the Children's Division is eliminated, $170,000 of the above fixed expenses could be avoided. The annual financial advantage (disadvantage) for the company of eliminating this division should be:

Stinehelfer Beet Processors, Inc., processes sugar beets in batches. A batch of sugar beets costs $56 to buy from farmers and $13 to crush in the company's plant. Two intermediate products, beet fiber and beet juice, emerge from the crushing process. The beet fiber can be sold as is for $24 or processed further for $12 to make the end product industrial fiber that is sold for $31. The beet juice can be sold as is for $43 or processed further for $29 to make the end product refined sugar that is sold for $91. What is the financial advantage (disadvantage) for the company from processing the intermediate product beet juice into refined sugar rather than selling it as is?

Cranston Corporation makes four products in a single facility. Data concerning these products appear below: The milling machines are potentially the constraint in the production facility. A total of 28,200 minutes are available per month on these machines. How many minutes of milling machine time would be required to satisfy demand for all four products?

Schickel Inc. regularly uses material B39U and currently has in stock 460 liters of the material for which it paid $3,128 several weeks ago. If this were to be sold as is on the open market as surplus material, it would fetch $5.95 per liter. New stocks of the material can be purchased on the open market for $6.45 per liter, but it must be purchased in lots of 1,000 liters. You have been asked to determine the relevant cost of 760 liters of the material to be used in a job for a customer. The relevant cost of the 760 liters of material B39U is:

The term joint cost is used to describe the costs incurred up to the split-off point in a process involving joint products.

Lakeshore Tours Inc., operates a large number of tours throughout the United States. A study has indicated that some of the tours are not profitable, and consideration is being given to dropping these tours in order to improve the company's overall operating performance. One such tour is a two-day Battlefields of the French and Indian Wars bus tour. An income statement from one of these tours is given below: Dropping this tour would not affect the number of buses in the company's fleet or the number of bus drivers on the company's payroll. Buses do not wear out through use; rather, they eventually become obsolete. Bus drivers are paid fixed annual salaries; tour guides are paid for each tour conducted. The "Bus maintenance and preparation" cost above is an allocation of the salaries of mechanics and other service personnel who are responsible for keeping the company's fleet of buses in good operating condition. There would be no change in the number of mechanics and other service personnel as a result of dropping this tour. The liability insurance depends upon the number of buses in the company's fleet and not upon how much they are used. Required: a. Prepare an analysis showing the financial advantage (disadvantage) if this tour is discontinued. b. The company's tour director has been criticized because only about 50% of the seats on the company's tours are being filled as compared to an average of 60% for the industry. The tour director has explained that the company's average seat occupancy could be improved considerably by eliminating about 10% of the tours, but that doing so would reduce profits. Do you agree with the tour director's conclusion? Explain your response.

Bertucci Corporation makes three products that use the current constraint which is a particular type of 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.)