Exam 12: Differential Analysis: The Key to Decision Making

Bertucci Corporation makes three products that use the current constraint whcih is a particular type of machine. Data concerning those products appear below: -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?

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. -Assuming all other conditions stay the same,at what level of annual sales of Doombugs (in units)should Draper be indifferent between discontinuing Doombugs or continuing the production and sale of Doombugs?

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. -What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 70,000 units required each year?

Mcniff Corporation makes a range of products.The company's predetermined overhead rate is $28 per direct labor-hour,which was calculated using the following budgeted data: Management is considering a special order for 200 units of product O96S at $122 each.The normal selling price of product O96S is $149 and the unit product cost is determined as follows: If the special order were accepted,normal sales of this and other products would not be affected.The company has ample excess capacity to produce the additional units.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 the special order. Required: The financial advantage (disadvantage)for the company as a result of accepting this special order would be:

Mcfarlain Corporation is presently making part U98 that is used in one of its products. A total of 7,000 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 $17.10 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 U98 from the outside supplier rather than to continue making the part,what would be the annual financial advantage (disadvantage)?

Bowen Company produces products P,Q,and R from a joint production process.Each product may be sold at the split-off point or be processed further.Joint production costs of $81,000 per year are allocated to the products based on the relative number of units produced.Data for Bowen's operations for the current year are as follows: Product P can be processed beyond the split-off point for an additional cost of $10,000 and can then be sold for $50,000.Product Q can be processed beyond the split-off point for an additional cost of $35,000 and can then be sold for $65,000.Product R can be processed beyond the split-off point for an additional cost of $6,000 and can then be sold for $25,000. Required: Which products should be processed beyond the split-off point?

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 500 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.However,assume that Younes has no excess capacity and this special order would require 30 minutes of the constraining resource,which could be used instead to produce products with a total contribution margin of $10,000.What is the minimum price per unit below which the company should not accept the special order?

Sunk costs are never relevant 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. -What is the financial advantage (disadvantage)for the company from processing one batch of sugar cane into the end products industrial fiber and molasses?

Kinsi Corporation manufactures five different products.All five of these products must pass through a stamping machine in its fabrication department.This machine is Kinsi's constrained resource.Kinsi would make the most profit if it produces the product that:

One way to increase the effective utilization of a bottleneck is to reduce the number of defective units.

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 is able to obtain part MR24 from an outside supplier at a purchase price of $10 per unit,the monthly financial advantage (disadvantage)of buying the part rather than making it would be:

Melbourne Corporation has traditionally made a subcomponent of its major product. Annual production of 30,000 subcomponents results in the following costs: Melbourne has received an offer from an outside supplier who is willing to provide the 30,000 units of the subcomponent each year at a price of $28 per unit. Melbourne knows that the facilities now being used to manufacture the subcomponent could be rented to another company for $80,000 per year if the subcomponent were purchased from the outside supplier. There would be no effect of this decision on the total fixed manufacturing overhead of the company. Assume that direct labor is a variable cost. -If Melbourne decides to purchase the subcomponent from the outside supplier,the annual financial advantage (disadvantage)would be:

Part U16 is used by Mcvean Corporation to make one of its products.A total of 13,000 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 the part and sell it to the company for $29.80 each.If this offer is accepted,the supervisor's salary and all of the variable costs,including the 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.In addition,the space used to make part U16 could be used to make more of one of the company's other products,generating an additional segment margin of $25,000 per year for that product.The annual financial advantage (disadvantage)for the company as a result of buying part U16 from the outside supplier should be:

Otool Inc.is considering using stocks of an old raw material in a special project.The special project would require all 240 kilograms of the raw material that are in stock and that originally cost the company $2,112 in total.If the company were to buy new supplies of this raw material on the open market,it would cost $9.25 per kilogram.However,the company has no other use for this raw material and would sell it at the discounted price of $8.35 per kilogram if it were not used in the special project.The sale of the raw material would involve delivery to the purchaser at a total cost of $71 for all 240 kilograms.What is the relevant cost of the 240 kilograms of the raw material when deciding whether to proceed with the special project?

The most recent monthly income statement for Benner Stores is given below: Due to its poor showing,consideration is being given to closing Store B.Studies show that if Store B is closed,one-fourth of its traceable fixed expenses will continue unchanged.The studies also show that closing Store B would result in a 10 percent decrease in sales in Store A.The company allocates common fixed expenses to the stores on the basis of sales dollars. Required: Determine the monthly financial advantage (disadvantage)of closing Store B.

Garson,Inc.produces three products.Data concerning the selling prices and unit costs of the three products appear below: Fixed costs are applied to the products on the basis of direct labor hours. Demand for the three products exceeds the company's productive capacity.The milling machine is the constraint,with only 2,400 minutes of milling machine time available this week. Required: a.Given the milling machine constraint,which product should be emphasized? Support your answer with appropriate calculations. b.Assuming that there is still unfilled demand for the product that the company should emphasize in part (a)above,up to how much should the company be willing to pay for an additional hour of milling machine time?

The following information relates to next year's projected operating results of the Children's Division of Grunge Clothing Corporation: If the Children's Division is eliminated,$170,000 of the above fixed expenses could be avoided.The annual financial advantage (disadvantage)for the company of eliminating this division should be:

Two alternatives, code-named X and Y, are under consideration at Guyer Corporation. Costs associated with the alternatives are listed below. -What is the financial advantage (disadvantage)of Alternative Y over Alternative X?

Holden Corporation produces three products,with costs and selling prices as follows: A particular machine is the bottleneck.On that machine,3 machine hours are required to produce each unit of Product A,1 hour is required to produce each unit of Product B,and 2 hours are required to produce each unit of Product C.Rank the products from the most profitable to the least profitable use of the constrained resource (bottleneck).