Exam 13: Differential Analysis: the Key to Decision Making

"Cost-plus" pricing means that all costs--manufacturing, selling, and administrative--are included in the cost base from which the target selling price is derived.

Suire Corporation is considering dropping product D14E. Data from the company's accounting system appear below: All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $204,000 of the fixed manufacturing expenses and $119,000 of the fixed selling and administrative expenses are avoidable if product D14E is discontinued.Required:a. According to the company's accounting system, what is the net operating income earned by product D14E?b. What would be the financial advantage (disadvantage) of dropping product D14E? Should the product be dropped?

Juliani Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 50,000 units per month is as follows: The normal selling price of the product is $75.00 per unit.An order has been received from an overseas customer for 3,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $0.30 less per unit on this order than on normal sales.Direct labor is a variable cost in this company.Required: a. Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $65.60 per unit. What is the financial advantage (disadvantage) for the company next month if it accepts the special order? b. Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer? c. Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 1,000 units for regular customers. What would be the minimum acceptable price per unit for the special order?

A product's economic value to the customer is the variable cost of the product plus the value of what differentiates the product from that alternative.

Target costing is primarily used with well-established products.

Fixed costs may be relevant in a decision.

Bochenski Mechanical Corporation has developed a new industrial grinder-model UF-48-that has been designed to outperform a competitor's best-selling industrial grinder. Model UF-48 has a useful life of 80,000 hours of service and its operating cost is $1.95 per hour. In contrast, the competitor's product has a useful life of 20,000 hours of service and has operating costs that average $2.75 per hour. The competitor's industrial grinder sells for $148,000. Bochenski has not yet established a selling price for model UF-48. Required: From a value-based pricing standpoint what is the differentiation value offered by model UF-48 relative to the competitor's offering for each 80,000 hours of service?

Holton Company makes three products in a single facility. Data concerning these products follow: The mixing machines are potentially the constraint in the production facility. A total of 14,000 minutes are available per month on these machines.Direct labor is a variable cost in this company.Required:a. How many minutes of mixing machine time would be required to satisfy demand for all three products?b. How much of each product should be produced to maximize net operating income? (Round final answers to the nearest whole unit.)c. Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity? (Round your intermediate calculations and final answer to 2 decimal places.)

In a special order situation that involves using capacity that is not idle, opportunity costs are zero.

Farrugia Corporation produces two intermediate products, A and B, from a common input. Intermediate product A can be further processed into Product X. Intermediate product B can be further processed into Product Y. The common input is purchased in batches that cost $41 each and the cost of processing a batch to produce intermediate products A and B is $17. Intermediate product A can be sold as is for $25 or processed further for $16 to make Product X that is sold for $37. Intermediate product B can be sold as is for $53 or processed further for $32 to make Product Y that is sold for $74.Required:a. Assuming that no other costs are involved in processing the common input or in selling products, what is the profit (loss) from processing one batch of the common input into the products X and Y?b. What is the Financial advantage (disadvantage) from further processing? Should each of the intermediate products, A and B, be sold as is or processed further?

The management of Bonga Corporation is considering dropping product D74F. Data from the company's accounting system for this product for last year appear below: All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $111,000 of the fixed manufacturing expenses and $103,000 of the fixed selling and administrative expenses are avoidable if product D74F is discontinued.What would be the financial advantage (disadvantage) from dropping product D74F?

The following are Silver Corporation's unit costs of making and selling an item at a volume of 8,000 units per month (which represents the company's capacity): Present sales amount to 7,000 units per month. An order has been received from a customer in a foreign market for 1,000 units. The order would not affect regular sales. Total fixed costs, both manufacturing and selling and administrative, would not be affected by this order. The variable selling and administrative costs would have to be incurred for this special order as well as all other sales. Assume that direct labor is a variable cost.What is the financial advantage (disadvantage) for the company from this special order if it prices the 1,000 units at $20 per unit?

A cost that is traceable to a segment through activity-based costing is always an avoidable cost for decision making.

Powel Corporation manufactures numerous products, one of which is called Gamma54. The company has provided the following data about this product: Required:a. What net operating income is the company earning now on its sales of Gamma54?b. Management is considering increasing the price of Gamma54 by 10%, from $16.00 to $17.60. The company's marketing managers estimate that this price hike would decrease unit sales by 15%, from 180,000 units to 153,000 units. Assuming that the total traceable fixed expense does not change, what net operating income will Gamma54 earn at a price of $17.60 if this sales forecast is correct?c. Assuming that the total traceable fixed expense does not change, if Powel increases the price of Gamma54 to $17.60, what percentage change in unit sales would provide the same net operating income that it currently earns at a price of $16.00? (Round your answer to the nearest one-tenth of a percent.)

Quamma Corporation makes a product that has the following costs: The company uses the absorption costing approach to cost-plus pricing as described in the text. The pricing calculations are based on budgeted production and sales of 23,000 units per year.The company has invested $280,000 in this product and expects a return on investment of 8%.Required:a. Compute the markup on absorption cost.b. Compute the selling price of the product using the absorption costing approach.

Kneller Corporation manufactures and sells medals for winners of athletic and other events. Its manufacturing plant has the capacity to produce 15,000 medals each month; current monthly production is 10,000 medals. The company normally charges $96 per medal. Cost data for the current level of production are shown below: The company has just received a special one-time order for 500 medals at $83 each. For this particular order, no variable selling and administrative costs would be incurred. This order would also have no effect on fixed costs. Assume that direct labor is a variable cost.Required:Should the company accept this special order?

Holding all other things constant, if the expected unit sales increase, then the markup under absorption costing will:

Wermers Industries Incorporated has developed a new drill press, model LS-88, that is designed to offer superior performance to a comparable drill press sold by Wermers's main competitor. The competing drill press sells for $31,000 and needs to be replaced after 1,000 hours of use. It also requires $6,000 of preventive maintenance during its useful life. Model LS-88'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 $7,000 of preventive maintenance during its useful life.From a value-based pricing standpoint what is model LS-88's economic value to the customer over its 2,000 hour life?

Payment of overtime to a worker in order to relax a production constraint could increase the profits of a company.

Zouar Computer Corporation currently manufactures the disk drives that it uses in its computers. The costs to produce 5,000 of these disk drives last year were as follows: Kidal Electronics has offered to provide Zouar with all of its disk drive needs for $27 per drive. If Zouar accepts this offer, Zouar will be able to use the freed up space to generate an additional $40,000 of income each year to produce more of its computer keyboards. Only $3 per drive of the fixed manufacturing overhead cost above could be avoided. Direct labor is an avoidable cost in this decision. Based on this information, would Zouar be financially better off making the drives or buying the drives and by how much?