Exam 13: Differential Analysis: the Key to Decision Making

Sunk costs are never relevant in decision making.

Secore Robotics Corporation has developed a new robot-model TR-53-that has been designed to outperform a competitor's best-selling robot. The competitor's product has a useful life of 20,000 hours of service, has operating costs that average $1.30 per hour, and sells for $109,000. In contrast, model TR-53 has a useful life of 100,000 hours of service and its operating cost is $0.80 per hour. Secore has not yet established a selling price for model TR-53.From a value-based pricing standpoint what is the reference value that Secore should consider when pricing model TR-53?

Weitman Corporation manufactures numerous products, one of which is called Epsilon50. The company has provided the following data about this product: What is the net operating income for product Epsilon50 at the current price?

The split-off point in a process that produces joint products is the point in the manufacturing process at which the joint products can be recognized as separate products.

The management of Rademacher Corporation is considering introducing a new product--a compact lawn blower. At a selling price of $37 per unit, management projects sales of 47,000 units. The lawn blower would require an investment of $500,000. The desired return on investment is 17%.The desired profit according to the target costing calculations is:

Yashinski Corporation manufactures numerous products, one of which is called Alpha46. The company has provided the following data about this product: Required: a. Management is considering increasing the price of Alpha46 by 15%, from $45.00 to $51.75. The company's marketing managers estimate that this price hike would decrease unit sales by 25%, from 110,000 units to 82,500 units. Assuming that the total traceable fixed expense does not change, what net operating income will Alpha46 earn at a price of $51.75 if this sales forecast is correct? b. Assuming that the total traceable fixed expense does not change, how many units of Alpha46 would Yashinski need to sell at a price of $51.75 to earn the same net operating income that it currently earns at a price of $45.00? (Round your answer up to the nearest whole number.)

Schickel Incorporated 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:

Morice Industries Incorporated has developed a new injection mold, model IA-05, that is designed to offer superior performance to a comparable injection mold sold by Morice's main competitor. The competing injection mold sells for $54,000 and needs to be replaced after 1,000 hours of use. It also requires $7,000 of preventive maintenance during its useful life. Model IA-05's performance capabilities are similar to the competing product with two important exceptions-it needs to be replaced only after 2,000 hours of use and it requires $8,000 of preventive maintenance during its useful life.From a value-based pricing standpoint what is the differentiation value offered by model IA-05 relative to the competitor's offering for each 2,000 hours of usage?

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:

Prosner Corporation manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $500,000 per year. The company allocates these costs to the joint products on the basis of their total sales value at the split-off point.Each product may be sold at the split-off point or processed further. The additional processing costs and sales value after further processing for each product (on an annual basis) are: Required: Which product or products should be sold at the split-off point, and which product or products should be processed further?

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 $87,000. Which of the products should be processed beyond the split-off point?

Kirsten Corporation makes 100,000 units per year of a part called a B345 gasket for use in one of its products. Data concerning the unit production costs of the B345 gasket follow: An outside supplier has offered to sell Kirsten Corporation all of the B345 gaskets it requires. If Kirsten Corporation decided to discontinue making the B345 gaskets, 25% of the above fixed manufacturing overhead costs could be avoided. Assume that direct labor is a variable cost.Required:a. Assume Kirsten Corporation has no alternative use for the facilities presently devoted to production of the B345 gaskets. If the outside supplier offers to sell the gaskets for $0.46 each, should Kirsten Corporation accept the offer? Fully support your answer with appropriate calculations.b. Assume that Kirsten Corporation could use the facilities presently devoted to production of the B345 gaskets to expand production of another product that would yield an additional contribution margin of $10,000 annually. What is the maximum price Kirsten Corporation should be willing to pay the outside supplier for B345 gaskets?

The management of Landstrom Corporation would like to set the selling price on a new product using the absorption costing approach to cost-plus pricing. The company's accounting department has supplied the following estimates for the new product: Management plans to produce and sell 6,000 units of the new product annually. The new product would require an investment of $1,036,200 and has a required return on investment of 10%.Required:a. Determine the unit product cost for the new product.b. Determine the markup percentage on absorption cost for the new product.c. Determine the selling price for the new product using the absorption costing approach.

Willow Corporation manufactures and sells 20,000 units of Product Z each year. In order to produce and sell this many units, it has been necessary for the company to make an investment of $500,000 in Product Z. The company requires a 20% rate of return on all investments in products. Selling and administrative expenses associated with Product Z total $200,000 per year. The unit product cost of Product Z is $20. The company uses the absorption costing approach to cost-plus pricing described in the text. The selling price for Product Z is:

The Tolar Corporation has 400 obsolete desk calculators that are carried in inventory at a total cost of $576,000. If these calculators are upgraded at a total cost of $110,000, they can be sold for a total of $170,000. As an alternative, the calculators can be sold in their present condition for $40,000.What is the financial advantage (disadvantage) to the company from upgrading the calculators?

In target costing, the cost of a product is the starting point and the selling price follows from the cost.

Mounger Industrial Products Incorporated has developed a new industrial forklift, model CZ-03, that is designed to offer superior performance to a comparable forklift sold by Mounger's main competitor. The competing forklift sells for $27,000 and needs to be replaced after 1,000 hours of use. It also requires $3,000 of preventive maintenance during its useful life. Model CZ-03's performance capabilities are similar to the competing forklift with two important exceptions-it needs to be replaced only after 4,000 hours of use and it requires $6,000 of preventive maintenance during its useful life. Required: From a value-based pricing standpoint what is the differentiation value offered by model CZ-03 relative to the competitor's forklift for each 4,000 hours of usage?

Buzby Corporation manufactures numerous products, one of which is called Epsilon-39. The company has provided the following data about this product: Required:a. Management is considering decreasing the price of Epsilon-39 by 5%, from $43.00 to $40.85. The company's marketing managers estimate that this price reduction would increase unit sales by 10%, from 90,000 units to 99,000 units. Assuming that the total traceable fixed expense does not change, what net operating income will Epsilon-39 earn at a price of $40.85 if this sales forecast is correct?b. Assuming that the total traceable fixed expense does not change, how many units of Epsilon-39 would Buzby need to sell at a price of $40.85 to earn the same net operating income that it currently earns at a price of $43.00? (Round your answer up to the nearest whole number.)

Gottshall Incorporated 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: 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?

Blauvelt Electronics Corporation has developed a new instrument-model GZ-29-that has been designed to outperform a competitor's best-selling instrument. Model GZ-29 has a useful life of 30,000 hours of service and its operating cost is $3.20 per hour.In contrast, the competitor's product has a useful life of 10,000 hours of service and has operating costs that average $5.60 per hour. The competitor's instrument sells for $149,000. Blauvelt has not yet established a selling price for model GZ-29.From a value-based pricing standpoint what is GZ-29's economic value to the customer over its 30,000 hour useful life?