Exam 13: Differential Analysis: the Key to Decision Making

Wallen Corporation is considering eliminating a department that has an annual contribution margin of $80,000 and $160,000 in annual fixed costs. Of the fixed costs, $90,000 cannot be avoided. The annual financial advantage (disadvantage) for the company of eliminating this department would be:

A study has been conducted to determine if Product A should be dropped. Sales of the product total $500,000; variable expenses total $340,000. Fixed expenses charged to the product total $210,000. The company estimates that $60,000 of these fixed expenses are not avoidable even if the product is dropped. If Product A is dropped, the annual financial advantage (disadvantage) for the company of eliminating this product should be:

The Tolar Corporation has 400 obsolete desk calculators that are carried in inventory at a total cost of $26,800. If these calculators are upgraded at a total cost of $10,000, they can be sold for a total of $30,000. As an alternative, the calculators can be sold in their present condition for $11,200.Assume that Tolar decides to upgrade the calculators. At what selling price per unit would the company be as well off as if it just sold the calculators in their present condition?

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)?

A customer has requested that Lewelling Corporation fill a special order for 3,100 units of product S47 for $31 a unit. While the product would be modified slightly for the special order, product S47's normal unit product cost is $22.20: Assume that 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 modifications made to product S47 that would increase the variable costs by $2.30 per unit and that would require an investment of $11,000.00 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. The annual financial advantage (disadvantage) for the company as a result of accepting this special order should be:

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?

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 58,900 minutes are available per month on these machines.Direct labor is a variable cost in this company.Up to how much should the company be willing to pay for one additional minute of grinding machine time if the company has made the best use of the existing grinding machine capacity? (Round your intermediate calculations to 2 decimal places.)

Sunk costs and future costs that do not differ between the alternatives may or may not be relevant in a decision.

Key Corporation is considering the addition of a new product. The expected cost and revenue data for the new product are as follows: If the new product is added, the combined contribution margin of the other, existing products is expected to drop $65,000 per year. Total common fixed corporate costs would be unaffected by the decision of whether to add the new product.At what selling price would the new product be just breaking even?

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.)

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: Assume that sufficient time is available on the constrained machine to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of this constrained resource? (Round your intermediate calculations to 2 decimal places.)

Magney, Inc., uses the absorption costing approach to cost-plus pricing described in the text to set prices for its products. Based on budgeted sales of 42,000 units next year, the unit product cost of a particular product is $61.90. The company's selling and administrative expenses for this product are budgeted to be $818,800 in total for the year. The company has invested $480,000 in this product and expects a return on investment of 10%.The selling price for this product based on the absorption costing approach would be closest to: (Do not round intermediate calculations.)

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.Suppose that if the Doombug toy is dropped, the production and sale of other Draper toys would increase so as to generate a $16,000 increase in the contribution margin received from these other toys. If all other conditions are the same, the financial advantage (disadvantage) from discontinuing the production and sale of Doombugs would be:

The management of Schmader Corporation is considering dropping product M12C. 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 $137,000 of the fixed manufacturing expenses and $79,000 of the fixed selling and administrative expenses are avoidable if product M12C is discontinued.Required:a. What is the net operating income earned by product M12C according to the company's accounting system?b. Determine the financial advantage (disadvantage) for the company of dropping product M12C. Should the product be dropped?

Demand for a product is said to be elastic if a change in price has:

Management of Thebeau, Incorporated, is considering a new product that would have a selling price of $49 per unit and projected sales of 35,000 units. The new product would require an investment of $570,000. The desired return on investment is 14%.Required: Determine the target cost per unit for the new product.

The SP Corporation makes 33,000 motors to be used in the production of its sewing machines. The average cost per motor at this level of activity is: An outside supplier recently began producing a comparable motor that could be used in the sewing machine. The price offered to SP Corporation for this motor is $23.05. If SP Corporation decides not to make the motors, there would be no other use for the production facilities and none of the fixed manufacturing overhead cost could be avoided. Direct labor is a variable cost in this company. The annual financial advantage (disadvantage) for the company as a result of making the motors rather than buying them from the outside supplier would be:

The Tolar Corporation has 400 obsolete desk calculators that are carried in inventory at a total cost of $26,800. If these calculators are upgraded at a total cost of $10,000, they can be sold for a total of $30,000. As an alternative, the calculators can be sold in their present condition for $11,200.What is the financial advantage (disadvantage) to the company from upgrading the calculators?

An automated turning machine is the current constraint at Jordison Corporation. Three products use this constrained resource. 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.)

Hammen Corporation manufactures numerous products, one of which is called Omicron43. The company has provided the following data about this product: Assume that the total traceable fixed expense does not change. If Hammen decreases the price of Omicron43 to $16.20, what percentage change in unit sales would provide the same net operating income as is currently being earned at a price of $18.00? (Your answer should be rounded to the nearest 0.1%.)