Exam 12: Differential Analysis: The Key to Decision Making

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. -Assume the company has 50 units left over from last year which have small defects and which will have to be sold at a reduced price for scrap.The sale of these defective units will have no effect on the company's other sales.Which of the following costs is relevant in this decision?

A customer has requested that Lewelling Corporation fill a special order for 9,000 units of product S47 for $20.50 a unit.While the product would be modified slightly for the special order,product S47's normal unit product cost is $14.40: 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 $5.00 per unit and that would require an investment of $36,000 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:

Landor Appliance Corporation makes and sells electric fans.Each fan regularly sells for $42.The following cost data per fan is based on a full capacity of 150,000 fans produced each period. A special order has been received by Landor for a sale of 25,000 fans to an overseas customer.The only selling costs that would be incurred on this order would be $4 per fan for shipping.Landor is now selling 120,000 fans through regular channels each period.Assume that direct labor is an avoidable cost in this decision.What should Landor use as a minimum selling price per fan in negotiating a price for this special order?

Ahrends Corporation makes 70,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: An outside supplier has offered to sell the company all of these parts it needs for $48.50 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $273,000 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $8.20 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products. -How much of the unit product cost of $54.90 is relevant in the decision of whether to make or buy the part?

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. -The annual financial advantage (disadvantage)for the company from discontinuing the production and sale of Doombugs would be:

Hamby Corporation is preparing a bid for a special order that would require 780 liters of material W34C.The company already has 640 liters of this raw material in stock that originally cost $8.30 per liter.Material W34C is used in the company's main product and is replenished on a periodic basis.The resale value of the existing stock of the material is $7.60 per liter.New stocks of the material can be readily purchased for $8.35 per liter.What is the relevant cost of the 780 liters of the raw material when deciding how much to bid on the special order?

Wehrs Corporation has received a request for a special order of 6,000 units of product K19 for $32.30 each.The normal selling price of this product is $33.45 each,but the units would need to be modified slightly for the customer.The normal unit product cost of product K19 is computed as follows: 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 some modifications made to product K19 that would increase the variable costs by $4.90 per unit and that would require a one-time investment of $23,000 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. Required: Determine the effect on the company's total net operating income of accepting the special order.Show your work!

The management of Furrow Corporation is considering dropping product L07E.Data from the company's budget for the upcoming 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 $186,000 of the fixed manufacturing expenses and $106,000 of the fixed selling and administrative expenses are avoidable if product L07E is discontinued.The financial advantage (disadvantage)for the company of eliminating this product for the upcoming year would be:

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 $149,000.Which of the products should be processed beyond the split-off point?

A cost that is assigned to a product using activity-based costing may or may not be a relevant cost in a decision involving that product.

Sharp Corporation produces 8,000 parts each year,which are used in the production of one of its products.The unit product cost of a part is $36,computed as follows: The parts can be purchased from an outside supplier for only $28 each.The space in which the parts are now produced would be idle and fixed production costs would be reduced by one-fourth.Based on these data,the financial advantage (disadvantage)of purchasing the parts from the outside supplier would be:

Elly Industries is a multi-product company that currently manufactures 30,000 units of part MR24 each month for use in production of its products. The facilities now being used to produce part MR24 have a fixed monthly cost of $150,000 and a capacity to produce 35,000 units per month. If Elly were to buy part MR24 from an outside supplier, the facilities would be idle, but its fixed costs would continue at 40% of their present amount. The variable production costs of Part MR24 are $11 per unit. -If Elly Industries continues to use 30,000 units of part MR24 each month,it would realize a financial advantage by purchasing this part from an outside supplier only if the supplier's unit price is less than:

Winder Corporation is a specialty component manufacturer with idle capacity.Management would like to use its extra capacity to generate additional profits.A potential customer has offered to buy 3,000 units of component QEA.Each unit of QEA requires 5 units of material F85 and 5 units of material E71.Data concerning these two materials follow: Material F85 is in use in many of the company's products and is routinely replenished.Material E71 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up. What would be the relevant cost of the materials,in total,for purposes of determining a minimum acceptable price for the order for product QEA?

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?

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?

Avoidable costs are irrelevant costs in decisions.

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 Y beyond the split-off point?

Banfield Corporation makes three products that use compound W,the current 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.

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

Lakeshore Tours Inc.,operates a large number of tours throughout the United States.A study has indicated that some of the tours are not profitable,and consideration is being given to dropping these tours in order to improve the company's overall operating performance.One such tour is a two-day Battlefields of the French and Indian Wars bus tour.An income statement from one of these tours is given below: Dropping this tour would not affect the number of buses in the company's fleet or the number of bus drivers on the company's payroll.Buses do not wear out through use; rather,they eventually become obsolete.Bus drivers are paid fixed annual salaries; tour guides are paid for each tour conducted.The "Bus maintenance and preparation" cost above is an allocation of the salaries of mechanics and other service personnel who are responsible for keeping the company's fleet of buses in good operating condition.There would be no change in the number of mechanics and other service personnel as a result of dropping this tour.The liability insurance depends upon the number of buses in the company's fleet and not upon how much they are used. Required: a.Prepare an analysis showing the financial advantage (disadvantage)if this tour is discontinued. b.The company's tour director has been criticized because only about 50% of the seats on the company's tours are being filled as compared to an average of 60% for the industry.The tour director has explained that the company's average seat occupancy could be improved considerably by eliminating about 10% of the tours,but that doing so would reduce profits.Do you agree with the tour director's conclusion? Explain your response.