Exam 12: Differential Analysis: The Key to Decision Making

Consistency demands that a cost that is relevant in one decision be regarded as relevant in other decisions as well.

Costs that can be eliminated in whole or in part if a particular business segment is discontinued are called:

When a company has a production constraint,the product with the lowest contribution margin per unit of the constrained resource should usually be given highest priority.

Brissett Corporation makes three products that use the current constraint,which is a particular type of machine.Data concerning those products appear below: Required: a.Rank the products in order of their current profitability from the most profitable to the least profitable.In other words,rank the products in the order in which they should be emphasized.Show your work! b.Assume that sufficient constraint time is available 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 the constrained resource?

Boney Corporation processes sugar beets that it purchases from farmers. Sugar beets are processed in batches. A batch of sugar beets costs $53 to buy from farmers and $18 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 $25 or processed further for $18 to make the end product industrial fiber that is sold for $39. The beet juice can be sold as is for $32 or processed further for $28 to make the end product refined sugar that is sold for $79. -Which of the intermediate products should be 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. -According to the company's accounting system,what is the net operating income earned by product D74F? Include all costs in this calculation-whether relevant or not.

A vertically integrated company is less dependent on its suppliers than a company that is not vertically integrated.

The variable costs of a product are relevant in a decision concerning whether to eliminate the product.

The Bharu Violin Corporation has the capacity to manufacture and sell 5,000 violins each year but is currently only manufacturing and selling 4,800. The following data relate to annual operations at 4,800 units: Woolgar Symphony Orchestra is interested in purchasing Bharu's excess capacity of 200 units but only if they can get the violins for $350 each. This special order would not affect regular sales or the total fixed costs. -Assume that Bharu is manufacturing and selling at capacity (5,000 units).Any special order will mean a loss of regular sales.Under these conditions if the special order from Woolgar Symphony Orchestra is accepted,the financial advantage (disadvantage)Bharu for the year should be:

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?

Recher Corporation uses part Q89 in one of its products.The company's Accounting Department reports the following costs of producing the 8,000 units of the part that are needed every year. An outside supplier has offered to make the part and sell it to the company for $27.60 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.If the outside supplier's offer were accepted,only $3,000 of these allocated general overhead costs would be avoided.In addition,the space used to produce part Q89 could be used to make more of one of the company's other products,generating an additional segment margin of $16,000 per year for that product. Required: a.Prepare a report that shows the financial impact of buying part Q89 from the supplier rather than continuing to make it inside the company. b.Which alternative should the company choose?

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:

The management of Woznick Corporation has been concerned for some time with the financial performance of its product V86O and has considered discontinuing it on several occasions. Data from the company's accounting system for this product for last 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 $30,000 of the fixed manufacturing expenses and $13,000 of the fixed selling and administrative expenses are avoidable if product V86O is discontinued. -What would be the financial advantage (disadvantage)from dropping product V86O?

Mae Refiners, Inc., processes sugar cane that it purchases from farmers. Sugar cane is processed in batches. A batch of sugar cane costs $60 to buy from farmers and $13 to crush in the company's plant. Two intermediate products, cane fiber and cane juice, emerge from the crushing process. The cane fiber can be sold as is for $29 or processed further for $13 to make the end product industrial fiber that is sold for $61. The cane juice can be sold as is for $40 or processed further for $28 to make the end product molasses that is sold for $67. -What is the financial advantage (disadvantage)for the company from processing the intermediate product cane juice into molasses rather than selling it as is?

A cost that can be avoided by choosing one alternative over another is relevant for decision purposes.

McGraw Company uses 5,000 units of Part X each year as a component in the assembly of one of its products.The company is presently producing Part X internally at a total cost of $100,000,computed as follows: An outside supplier has offered to provide Part X at a price of $18 per unit.If McGraw Company stops producing the part internally,one-third of the fixed manufacturing overhead would be eliminated.Assume that direct labor is a variable cost. Required: Prepare an analysis showing the annual financial advantage or disadvantage of accepting the outside supplier's offer.

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 anticipates selling only 50,000 units of Pong to regular customers next year.If Mowen Corporation offers to buy the special order units at $65 per unit,the annual financial advantage (disadvantage)for the company as a result of accepting this special order should be:

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. -In addition to the facts given above,assume that the space used to produce part U98 could be used to make more of one of the company's other products,generating an additional segment margin of $24,000 per year for that product.What would be the financial advantage (disadvantage)of buying part U98 from the outside supplier and using the freed space to make more of the other product?

Dock Corporation makes two products from a common input. Joint processing costs up to the split-off point total $33,600 a year. The company allocates these costs to the joint products on the basis of their total sales values at the split-off point. Each product may be sold at the split-off point or processed further. Data concerning these products appear below: -What is the financial advantage (disadvantage)for the company of processing Product X beyond the split-off point?

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 9,800 minutes are available per month on these machines. Direct labor is a variable cost in this company. -Which product makes the LEAST profitable use of the grinding machines?