Exam 12: Differential Analysis: The Key to Decision Making

The Freed Corporation produces three products,X,Y,Z,from a single raw material input.Product Y can be sold at the split-off point for total annual revenues of $50,000,or it can be processed further at a total annual cost of $16,000 and then sold for $68,000.Which of the following statements is true concerning Product Y?

A joint product is:

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. -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 $60.60 per unit.The monthly financial advantage (disadvantage)for the company as a result of accepting this special order should be:

Supler Corporation produces a part used in the manufacture of one of its products.The unit product cost is $18,computed as follows: An outside supplier has offered to provide the annual requirement of 4,000 of the parts for only $14 each.The company estimates that 60% of the fixed manufacturing overhead cost above could be eliminated if the parts are purchased from the outside supplier.Assume that direct labor is an avoidable cost in this decision.Based on these data,the financial advantage (disadvantage)of purchasing the parts from the outside supplier would be:

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

Younes Inc. manufactures industrial components. One of its products, which is used in the construction of industrial air conditioners, is known as P06. Data concerning this product are given below: The above per unit data are based on annual production of 4,000 units of the component. Assume that direct labor is a variable cost. -The company has received a special,one-time-only order for 400 units of component P06.There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order.Assuming that Younes has excess capacity and can fill the order without cutting back on the production of any product,what is the minimum price per unit below which the company should not accept the special order?

A customer has asked Lalka Corporation to supply 3,000 units of product H60,with some modifications,for $34.70 each.The normal selling price of this product is $46.35 each.The normal unit product cost of product H60 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 H60 that would increase the variable costs by $3.80 per unit and that would require a one-time investment of $24,000 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 financial advantage or disadvantage of accepting the special order.Show your work!

Gordon Corporation produces 1,000 units of a part per year which are used in the assembly of one of its products.The unit cost of producing these parts is: The part can be purchased from an outside supplier at $20 per unit.If the part is purchased from the outside supplier,two thirds of the total fixed costs incurred in producing the part can be avoided.The annual financial advantage (disadvantage)for the company as a result of buying the part from the outside supplier would be:

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 $36 each and the cost of processing a batch to produce intermediate products A and B is $15.Intermediate product A can be sold as is for $21 or processed further for $14 to make Product X that is sold for $32.Intermediate product B can be sold as is for $44 or processed further for $28 to make Product Y that is sold for $64. 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? Show your work! b.Should each of the intermediate products,A and B,be sold as is or processed further? Explain.

In a decision to drop a product,the product should be charged for rent in proportion to the space it occupies even if the space has no alternative use and the rental payment is unavoidable.

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. -What is the financial advantage (disadvantage)for the company from processing the intermediate product beet juice into refined sugar rather than selling it as is?

Gottshall Inc.makes a range of products.The company's predetermined overhead rate is $19 per direct labor-hour,which was calculated using the following budgeted data: Component P0 is used in one of the company's products.The unit cost of the component according to the company's cost accounting system is determined as follows: An outside supplier has offered to supply component P0 for $78 each.The outside supplier is known for quality and reliability.Assume that direct labor is a variable cost,variable manufacturing overhead is really driven by direct labor-hours,and total fixed manufacturing overhead would not be affected by this decision.Gottshall chronically has idle capacity. Required: Is the offer from the outside supplier financially attractive? Why?

Sardi Inc.is considering whether to continue to make a component or to buy it from an outside supplier.The company uses 17,000 of the components each year.The unit product cost of the component according to the company's cost accounting system is given as follows: Assume that direct labor is a variable cost.Of the fixed manufacturing overhead,70% is avoidable if the component were bought from the outside supplier.In addition,making the component uses 2 minutes on the machine that is the company's current constraint.If the component were bought,time would be freed up for use on another product that requires 4 minutes on this machine and that has a contribution margin of $7.00 per unit. When deciding whether to make or buy the component,what cost of making the component should be compared to the price of buying the component?

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.

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:

Prosner Corp.manufactures three products from a common input in a joint processing operation.Joint processing costs up to the split-off point total $500,000 per year.The company allocates these costs to the joint products on the basis of their total sales value at the split-off point. Each product may be sold at the split-off point or processed further.The additional processing costs and sales value after further processing for each product (on an annual basis)are: Required: Which product or products should be sold at the split-off point,and which product or products should be processed further? Show computations.

Marsdon Company has an annual production capacity of 15,000 units.The costs associated with production and sale of the company's product are given below: The company presently is selling 12,000 units annually at a selling price of $28 each.A special order has been received from a distributor who wants to purchase 3,000 units at a special price of $20 each.Regular sales would not be affected by this order and the order could be filled without any impact on total fixed costs.Sales commissions on the special order would be reduced by one-third. Required: Determine whether the company should accept the special order.

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. -The sunk cost in this situation is:

Kirsten Corporation makes 100,000 units per year of a part called a B345 gasket for use in one of its products.Data concerning the unit production costs of the B345 gasket follow: An outside supplier has offered to sell Kirsten Corporation all of the B345 gaskets it requires.If Kirsten Corporation decided to discontinue making the B345 gaskets,25% of the above fixed manufacturing overhead costs could be avoided.Assume that direct labor is a variable cost. Required: a.Assume Kirsten Corporation has no alternative use for the facilities presently devoted to production of the B345 gaskets.If the outside supplier offers to sell the gaskets for $0.46 each,should Kirsten Corporation accept the offer? Fully support your answer with appropriate calculations. b.Assume that Kirsten Corporation could use the facilities presently devoted to production of the B345 gaskets to expand production of another product that would yield an additional contribution margin of $10,000 annually.What is the maximum price Kirsten Corporation should be willing to pay the outside supplier for B345 gaskets?

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? Show your work! b.Determine the financial advantage (disadvantage)for the company of dropping product M12C.Should the product be dropped? Show your work!