Exam 11: Differential Analysis: The Key to Decision Making

In a special order situation that involves using capacity that is not idle, opportunity costs are zero.

What is the financial advantage (disadvantage)of Alternative Y over Alternative X?

The term joint cost is used to describe the costs incurred up to the split-off point in a process involving joint products.

Benjamin Company produces products C, J, and R from a joint production process.Each product may be sold at the split-off point or processed further.Joint production costs of $95,000 per year are allocated to the products based on the relative number of units produced.Data for Benjamin's operations for last year follow: Required: Which products should be processed beyond the split-off point?

If the new product is added next year, the financial advantage (disadvantage)resulting from this decision would be:

An avoidable cost is a sunk cost that can be eliminated (in whole or in part)as a result of choosing one alternative over another.

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:

Marsdon Company has an annual production capacity of 15,000 units.The costs associated with production and sale of the company's product are given below: The company presently is selling 12,000 units annually at a selling price of $28 each.A special order has been received from a distributor who wants to purchase 3,000 units at a special price of $20 each.Regular sales would not be affected by this order and the order could be filled without any impact on total fixed costs.Sales commissions on the special order would be reduced by one-third. Required: Determine whether the company should accept the special order.

If machine hours are the constraint, then the ranking of the products from the most profitable to the least profitable use of the constrained resource is:

In a factory operating at capacity, every machine and person should be working at the maximum possible rate.

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:

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

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?

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:

How many minutes of grinding machine time would be required to satisfy demand for all four products?

Opportunity costs represent costs that can be reduced by effective management of operations.

In a special order situation, any fixed cost associated with the order would be irrelevant.

The management of Schmader Corporation is considering dropping product M12C.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 $137,000 of the fixed manufacturing expenses and $79,000 of the fixed selling and administrative expenses are avoidable if product M12C is discontinued. Required: a.What is the net operating income earned by product M12C according to the company's accounting system? Show your work! b.Determine the financial advantage (disadvantage)for the company of dropping product M12C.Should the product be dropped? Show your work!

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

Holton Company makes three products in a single facility.Data concerning these products follow: The mixing machines are potentially the constraint in the production facility.A total of 14,700 minutes are available per month on these machines. Direct labor is a variable cost in this company. Required: a.How many minutes of mixing machine time would be required to satisfy demand for all three products? b.How much of each product should be produced to maximize net operating income? (Round off to the nearest whole unit.) c.Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity? (Round off to the nearest whole cent.)