Exam 12: Differential Analysis: The Key to Decision Making

Ouzts Corporation is considering Alternative A and Alternative B. Costs associated with the alternatives are listed below: -What is the financial advantage (disadvantage)of Alternative B over Alternative A?

Juliani Company produces a single product.The cost of producing and selling a single unit of this product at the company's normal activity level of 50,000 units per month is as follows: The normal selling price of the product is $75.00 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 have no effect on the company's normal sales and would not change the total amount of the company's fixed costs.The variable selling and administrative expense would be $0.30 less per unit on this order than on normal sales. Direct labor is a variable cost in this company. Required: a.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 $65.60 per unit.What is the financial advantage (disadvantage)for the company next month if it accepts the special order? b.Suppose the company is already operating at capacity when the special order is received from the overseas customer.What would be the opportunity cost of each unit delivered to the overseas customer? c.Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 1,000 units for regular customers.What would be the minimum acceptable price per unit for the special order?

Drew Cane Products,Inc.,processes sugar cane in batches.The company buys a batch of sugar cane from farmers for $90 which is then crushed in the company's plant at a cost of $11.Two intermediate products,cane fiber and cane juice,emerge from the crushing process.The cane fiber can be sold as is for $21 or processed further for $13 to make the end product industrial fiber that is sold for $45.The cane juice can be sold as is for $41 or processed further for $29 to make the end product molasses that is sold for $103.What is the financial advantage (disadvantage)for the company from processing one batch of sugar cane into the end products industrial fiber and molasses?

A complete income statement need not be prepared as part of a differential cost analysis.

The opportunity cost of making a component part in a factory with excess capacity for which there is no alternative use is:

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. -What is the financial advantage (disadvantage)for the company from this special order if it prices the 1,000 units at $20 per unit?

The constraint at Rauchwerger 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 the constrained resource?

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?

Cybil Baunt just inherited a 1958 Chevy Impala from her late Aunt Joop.Aunt Joop purchased the car 40 years ago for $8,000.Cybil is either going to sell the car for $10,000 or have it restored and then sell it for $22,000.The restoration will cost $9,000.Cybil would be financially better off by:

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 minimum amount the company should accept for Product X if it is to be sold at the split-off point?

Faustina Chemical Corporation manufactures three chemicals (TX14,NJ35,and KS63)from a joint process.The three chemicals are in industrial grade form at the split-off point.They can either be sold at that point or processed further into premium grade.Costs related to each batch of this chemical process is as follows: For which product(s)above would it be more profitable for Faustina to sell at the split-off point rather than process further?

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. -If the special order from Woolgar Symphony Orchestra is accepted,the financial advantage (disadvantage)Bharu for the year should be:

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:

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:

Accepting a special order will improve overall net operating income if the revenue from the special order exceeds:

The book value of an old machine is always considered an opportunity cost in a decision.

Cranston Corporation makes four products in a single facility. Data concerning these products appear below: The milling machines are potentially the constraint in the production facility. A total of 28,200 minutes are available per month on these machines. -Which product makes the MOST profitable use of the milling machines?

Anglen Co.manufactures and sells trophies for winners of athletic and other events.Its manufacturing plant has the capacity to produce 18,000 trophies each month; current monthly production is 14,400 trophies.The company normally charges $103 per trophy.Cost data for the current level of production are shown below: The company has just received a special one-time order for 900 trophies at $48 each.For this particular order,no variable selling and administrative costs would be incurred.This order would also have no effect on fixed costs.Assume that direct labor is a variable cost. Required: Should the company accept this special order? Why?

The Cook Corporation has two divisions--East and West.The divisions have the following revenues and expenses: The management of Cook is considering the elimination of the West Division.If the West Division were eliminated,its traceable fixed costs could be avoided.Total common corporate costs would be unaffected by this decision.Given these data,the elimination of the West Division would result in an overall company net operating income (loss)of:

Penagos Corporation is presently making part Z43 that is used in one of its products. A total of 5,000 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 $20.80 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 $4,000 of these allocated general overhead costs would be avoided. -In addition to the facts given above,assume that the space used to produce part Z43 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 annual financial advantage (disadvantage)of buying part Z43 from the outside supplier and using the freed space to make more of the other product?