Exam 13: Differential Analysis: the Key to Decision Making

Kirgan, Incorporated, manufactures a product with the following costs: The company uses the absorption costing approach to cost-plus pricing described in the text. The pricing calculations are based on budgeted production and sales of 82,000 units per year.The company has invested $230,000 in this product and expects a return on investment of 16%.The selling price based on the absorption costing approach would be closest to: (Do not round intermediate calculations.)

Kinsi Corporation manufactures five different products. All five of these products must pass through a stamping machine in its fabrication department. This machine is Kinsi's constrained resource. Kinsi would make the most profit if it produces the product that:

Ecob Corporation uses the absorption costing approach to cost-plus pricing as described in the text to set prices for its products. Based on budgeted sales of 19,000 units next year, the unit product cost of a particular product is $16.00. The company's selling and administrative expenses for this product are budgeted to be $250,800 in total for the year. The company has invested $440,000 in this product and expects a return on investment of 14%.The markup on absorption cost for this product would be closest to:

Saalfrank Corporation is considering two alternatives that are code-named M and N. Costs associated with the alternatives are listed below: Required:a. Which costs are relevant and which are not relevant in the choice between these two alternatives?b. What is the differential cost between the two alternatives?

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?

Lodholz Corporation would like to use target costing for a new product that is under consideration. At a selling price of $93 per unit, management projects sales of 10,000 units. The new product would require an investment of $900,000. The desired return on investment is 17%.Required:Determine the target cost per unit for the new product.

A new product, an automated crepe maker, is being introduced at Knutt Corporation. At a selling price of $59 per unit, management projects sales of 70,000 units. Launching the crepe maker as a new product would require an investment of $500,000. The desired return on investment is 12%. The target cost per crepe maker is closest to:

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 can sell 58,000 units of Pong to regular customers next year. If Mowen Corporation offers to buy the 6,000 special order units at $65 per unit, the annual financial advantage (disadvantage) for Melville as a result of accepting this special order should be:

Shoun Mechanical Corporation has developed a new industrial grinder-model QJ-47-that has been designed to outperform a competitor's best-selling industrial grinder. Model QJ-47 has a useful life of 120,000 hours of service and its operating cost is $0.60 per hour. In contrast, the competitor's product has a useful life of 30,000 hours of service and has operating costs that average $0.90 per hour. The competitor's industrial grinder sells for $129,000. Shoun has not yet established a selling price for model QJ-47.From a value-based pricing standpoint what is QJ-47's economic value to the customer over its 120,000 hour useful life?

Which of the following costs are always irrelevant in decision making?

The management of Rademacher Corporation is considering introducing a new product--a compact lawn blower. At a selling price of $24 per unit, management projects sales of 30,000 units. The lawn blower would require an investment of $200,000. The desired return on investment is 12%.The desired profit according to the target costing calculations is:

The sensitivity of unit sales to changes in price is called the price elasticity of demand.

Tavis Robotics Corporation has developed a new robot-model FI-73-that has been designed to out perform a competitor's best-selling robot. The competitor's product has a useful life of 10,000 hours of service, has operating costs that average $4.60 per hour, and sells for $109,000. In contrast, model FI-73 has a useful life of 30,000 hours of service and its operating cost is $2.60 per hour. Tavis has not yet established a selling price for model FI-73.From a value-based pricing standpoint what is FI-73's economic value to the customer over its 30,000 hour useful life?

Kinsley Corporation manufactures numerous products, one of which is called Kappa03. The company has provided the following data about this product: Assume that the total traceable fixed expense does not change. If Kinsley increases the price of Kappa03 to $38.52, what percentage change in unit sales would provide the same net operating income as is currently being earned at a price of $36.00? (Your answer should be rounded to the nearest 0.1%.)

Home Products, Incorporated, is planning the introduction of a new food dryer. To compete effectively, the dryer would have to be priced at no more than $40 per unit. An investment of $600,000 would have to be made in order to produce and sell the new dryer. The company requires a return on investment of at least 25% on new products. Assuming that the company expects to produce and sell 30,000 dryers per year, the target cost per dryer would be closest to:

Elfalan Corporation produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 80,000 units per month is as follows: The normal selling price of the product is $67.80 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 not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.90 less per unit on this order than on normal sales.Direct labor is a variable cost in this company.What is the contribution margin per unit on normal sales? (Round your intermediate calculations to 2 decimal places.)

Part U16 is used by Mcvean Corporation to make one of its products. A total of 13,000 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 make the part and sell it to the company for $29.80 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including the 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. In addition, the space used to make part U16 could be used to make more of one of the company's other products, generating an additional segment margin of $25,000 per year for that product. The annual financial advantage (disadvantage) for the company as a result of buying part U16 from the outside supplier should be:

Paluso Corporation manufactures numerous products, one of which is called Alpha42. The company has provided the following data about this product: Management is considering increasing the price of Alpha42 by 4%, from $18.00 to $18.72. The company's marketing managers estimate that this price hike would decrease unit sales by 10%, from 180,000 units to 162,000 units. Assuming that the total traceable fixed expense does not change, what net operating income will product Alpha-42 earn at a price of $18.72 if this sales forecast is correct?

Fixed costs are irrelevant in decisions about whether a product should be dropped.

Opportunity costs represent costs that can be reduced by effective management of operations.