Exam 11: Differential Analysis: The Key to Decision Making

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

Sunk costs are never relevant in 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.

Future costs that do differ among the alternatives are not relevant in a decision.

What is the financial advantage (disadvantage)of Alternative B over Alternative A?

What would be the financial advantage (disadvantage)from dropping product V86O?

What is the financial advantage (disadvantage)of purchasing the part rather than making it?

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?

Foto Company makes 50,000 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 $37.30 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 $310,000 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided.However, $9.70 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. Required: a.How much of the unit product cost of $38.20 is relevant in the decision of whether to make or buy the part? b.What is the financial advantage (disadvantage)of purchasing the part rather than making it? c.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 50,000 units required each year?

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

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:

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.

Wallen Corporation is considering eliminating a department that has an annual contribution margin of $80,000 and $160,000 in annual fixed costs.Of the fixed costs, $90,000 cannot be avoided.The annual financial advantage (disadvantage)for the company of eliminating this department would be:

Which of the following would be relevant in the decision to sell or throw out obsolete inventory?

Fixed costs are sunk costs.

United Industries manufactures a number of products at its highly automated factory.The products are very popular, with demand far exceeding the factory's capacity.To maximize profit, management should rank products based on their:

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:

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:

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?

Product X-547 is one of the joint products in a joint manufacturing process.Management is considering whether to sell X-547 at the split-off point or to process X-547 further into Xylene.The following data have been gathered: I.Selling price of X-547 II.Variable cost of processing X-547 into Xylene. III.The avoidable fixed costs of processing X-547 into Xylene. IV.The selling price of Xylene. V.The joint cost of the process from which X-547 is produced. Which of the above items are relevant in a decision of whether to sell the X-547 as is or process it further into Xylene?