Exam 12: Differential Analysis: The Key to Decision Making

Fixed costs are sunk costs.

Sunk costs are costs that have proven to be unproductive.

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

Ibsen Company makes two products from a common input.Joint processing costs up to the split-off point total $43,200 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: Required: a.What is financial advantage (disadvantage)of processing Product X beyond the split-off point? b.What is financial advantage (disadvantage)of processing Product Y beyond the split-off point? c.What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point? d.What is the minimum amount the company should accept for Product Y if it is to be sold at the split-off point?

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 LEAST profitable use of the milling machines?

Rebelo Corporation is presently making part E07 that is used in one of its products.A total of 17,000 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 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,none of which would be avoided if the part were purchased instead of produced internally.If management decides to buy part E07 from the outside supplier rather than to continue making the part,what would be the annual impact on the company's overall net operating income?

A cost that is traceable to a segment through activity-based costing is always an avoidable cost for decision making.

The split-off point in a process that produces joint products is the point in the manufacturing process at which the joint products can be recognized as separate products.

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. -If management decides to buy part Z43 from the outside supplier rather than to continue making the part,what would be the annual financial advantage (disadvantage)?

Lusk Corporation produces and sells 10,000 units of Product X each month.The selling price of Product X is $40 per unit,and variable expenses are $32 per unit.A study has been made concerning whether Product X should be discontinued.The study shows that $70,000 of the $120,000 in monthly fixed expenses charged to Product X would not be avoidable even if the product was discontinued.If Product X is discontinued,the annual financial advantage (disadvantage)for the company of eliminating this product should be:

In a sell or process further decision,consider the following costs: I.A variable production cost incurred prior to split-off. II.A variable production cost incurred after split-off. III.An avoidable fixed production cost incurred after split-off. Which of the above costs is (are)not relevant in a decision regarding whether the product should be processed further?

Fixed costs may be relevant in a decision.

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 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 1,600 units for regular customers.The minimum acceptable price per unit for the special order is closest to:

Stinehelfer Beet Processors,Inc.,processes sugar beets in batches.A batch of sugar beets costs $56 to buy from farmers and $13 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 $24 or processed further for $12 to make the end product industrial fiber that is sold for $31.The beet juice can be sold as is for $43 or processed further for $29 to make the end product refined sugar that is sold for $91.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?

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

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. -Which of the intermediate products should be processed further?

The Anaconda Mining Company currently is operating at less than 50 percent of practical capacity.The management of the company expects sales to drop below the present level of 15,000 tons of ore per month very soon.The selling price per ton of ore is $2 and the variable cost per ton is $1.Fixed costs per month total $15,000. Management is concerned that a further drop in sales volume will generate a loss and,accordingly,is considering the temporary suspension of operations until demand in the metals markets returns to normal levels and prices rebound.Management has implemented a cost reduction program over the past year that has been successful in reducing costs.Nevertheless,suspension of operations appears to be the only viable alternative.Management estimates that suspension of operations would reduce fixed costs from $15,000 to $5,000 per month. Required: a.Why does management estimate that fixed costs will persist at $5,000 per month even though the mine is temporarily closed? b.At what sales volume should management suspend operations at the mine?

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. -Assume that dropping Product JYMP will have no effect on other products.The annual financial advantage (disadvantage)for the company of eliminating this product should be:

Fabri Corporation is considering eliminating a department that has an annual contribution margin of $35,000 and $70,000 in annual fixed costs.Of the fixed costs,$25,000 cannot be avoided.The annual financial advantage (disadvantage)for the company of eliminating this department would be:

Two alternatives, code-named X and Y, are under consideration at Guyer Corporation. Costs associated with the alternatives are listed below. -Are the materials costs and processing costs relevant in the choice between alternatives X and Y?