Exam 12: Differential Analysis: The Key to Decision Making

Key Corporation is considering the addition of a new product. The expected cost and revenue data for the new product are as follows: If the new product is added, the combined contribution margin of the other, existing products is expected to drop $65,000 per year. Total common fixed corporate costs would be unaffected by the decision of whether to add the new product. -At what selling price would the new product be just breaking even?

Suire Corporation is considering dropping product D14E.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 $72,000 of the fixed manufacturing expenses and $48,000 of the fixed selling and administrative expenses are avoidable if product D14E is discontinued. Required: a.According to the company's accounting system,what is the net operating income earned by product D14E? Show your work! b.What would be the financial advantage (disadvantage)of dropping product D14E? Should the product be dropped? Show your work!

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 one batch of sugar beets into the end products industrial fiber and refined sugar?

Part U67 is used in one of Broce Corporation's products.The company's Accounting Department reports the following costs of producing the 7,000 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 $21.40 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 $6,000 of these allocated general overhead costs would be avoided. Required: a.Prepare a report that shows the financial impact of buying part U67 from the supplier rather than continuing to make it inside the company. b.Which alternative should the company choose?

The constraint at Dreyfus Inc.is an expensive milling machine.The three products listed below use this constrained resource. 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?

When a company has a production constraint,total contribution margin will be maximized by emphasizing the products with the highest contribution margin per unit of the constrained resource.

Wood Carving Corporation manufactures three products.Because of a recent lack of skilled wood carvers,the corporation has had a shortage of available labor hours.The following per unit data relates to the three products of the corporation: Assume that Wood Carving only has 1,800 labor hours available next month.Also assume that Wood Carving can only sell 800 units of each product in a given month.What is the maximum amount of contribution margin that Wood Carving can generate next month given this labor hour shortage?

It is profitable to continue processing joint products after the split-off point if their total revenues exceed the joint costs.

Two products,QI and VH,emerge from a joint process.Product QI has been allocated $9,600 of the total joint costs of $12,000.A total of 9,000 units of product QI are produced from the joint process.Product QI can be sold at the split-off point for $13 per unit,or it can be processed further for an additional total cost of $54,000 and then sold for $18 per unit.If product QI is processed further and sold,what would be the financial advantage (disadvantage)for the company compared with sale in its unprocessed form directly after the split-off point?

Bertucci Corporation makes three products that use the current constraint whcih is a particular type of 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.

Marley Corporation makes three products (X,Y,& Z)with the following characteristics: The company has a capacity of 2,000 machine hours,but there is virtually unlimited demand for each product.In order to maximize total contribution margin,how many units of each product should the company produce?

Swagger Corporation purchases potatoes from farmers.The potatoes are then peeled,producing two intermediate products-peels and depeeled spuds.The peels can then be processed further to make a cocktail of organic nutrients.And the depeeled spuds can be processed further to make frozen french fries.A batch of potatoes costs $63 to buy from farmers and $12 to peel in the company's plant.The peels produced from a batch can be sold as is for animal feed for $29 or processed further for $15 to make the cocktail of nutrients that are sold for $41.The depeeled spuds can be sold as is for $40 or processed further for $22 to make frozen french fries that are sold for $77. Required: a.Assuming that no other costs are involved in processing potatoes or in selling products,how much money does the company make from processing one batch of potatoes into the cocktail of organic nutrients and frozen french fries? Show your work! b.Should each of the intermediate products,peels and depeeled spuds,be sold as is or processed further into an end product? Explain.

The Wester Corporation produces three products with the following costs and selling prices: The company has insufficient capacity to fulfill all of the demand for these three products. -If direct labor hours are the constraint,then the ranking of the products from the most profitable to the least profitable use of the constrained resource is:

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. -According to the company's accounting system,what is the net operating income earned by product V86O? Include all costs in this calculation-whether relevant or not.

An avoidable fixed production cost incurred before the split-off point in a joint process is relevant in a sell or process further decision.

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.At what selling price for the 6,000 special order units would Melville be financially indifferent between accepting or rejecting the special order from Mowen?

Kneller Co.manufactures and sells medals for winners of athletic and other events.Its manufacturing plant has the capacity to produce 12,000 medals each month; current monthly production is 9,600 medals.The company normally charges $99 per medal.Cost data for the current level of production are shown below: The company has just received a special one-time order for 500 medals at $89 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?

A disadvantage of vertical integration is that by pooling demand for parts from a number of companies,a supplier may be able to enjoy economies of scale that result in higher quality and lower cost than if every company makes its own parts.

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. -Assume that Tolar decides to upgrade the calculators.At what selling price per unit would the company be as well off as if it just sold the calculators in their present condition?

The SP Corporation makes 40,000 motors to be used in the production of its sewing machines.The average cost per motor at this level of activity is: An outside supplier recently began producing a comparable motor that could be used in the sewing machine.The price offered to SP Corporation for this motor is $18.If SP Corporation decides not to make the motors,there would be no other use for the production facilities and none of the fixed manufacturing overhead cost could be avoided.Direct labor is a variable cost in this company.The annual financial advantage (disadvantage)for the company as a result of making the motors rather than buying them from the outside supplier would be: