Exam 11: Differential Analysis: The Key to Decision Making

Sunk costs and future costs that do not differ between the alternatives may or may not be relevant in a decision.

Hodge Inc.has some material that originally cost $74,600.The material has a scrap value of $57,400 as is, but if reworked at a cost of $1,500, it could be sold for $54,400.What would be the financial advantage (disadvantage)of reworking and selling the material rather than selling it as is as scrap?

Companies often allocate common fixed costs among segments.For example, common fixed corporate costs are often allocated to divisions and appear as part of the divisional performance reports. Required: What dangers are there in allocating common fixed costs to segments when involved in a decision to possibly drop a segment such as a product or a division?

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?

Norgaard Corporation makes 8,000 units of part G25 each year.This part is used in one of the company's products.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 $21.20 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 $2,000 of these allocated general overhead costs would be avoided.In addition, the space used to produce part G25 would be used to make more of one of the company's other products, generating an additional segment margin of $16,000 per year for that product. The annual financial advantage (disadvantage)for the company as a result of buying part G25 from the outside supplier should be:

When a company has a production constraint, the product with the lowest contribution margin per unit of the constrained resource should usually be given highest priority.

Fixed costs may be relevant in a decision.

The annual financial advantage (disadvantage)for the company from discontinuing the production and sale of Doombugs would be:

The constraint at Rauchwerger Corporation is time on a particular machine.The company makes three products that use this machine.Data concerning those products appear below: Assume that sufficient time is available on the constrained machine 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 variable costs of a product are relevant in a decision concerning whether to eliminate the product.

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!

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 rather than not processing that batch at all?

What is the financial advantage (disadvantage)to the company from upgrading the calculators?

Accepting a special order will improve overall net operating income if the revenue from the special order exceeds:

Prosner Corp.manufactures three products from a common input in a joint processing operation.Joint processing costs up to the split-off point total $500,000 per year.The company allocates these costs to the joint products on the basis of their total sales value at the split-off point. Each product may be sold at the split-off point or processed further.The additional processing costs and sales value after further processing for each product (on an annual basis)are: Required: Which product or products should be sold at the split-off point, and which product or products should be processed further? Show computations.

What is the financial advantage (disadvantage)for the company from this special order if it prices the 1,000 units at $20 per unit?

Which of the intermediate products should be processed further?

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?

Variable costs are always relevant costs in decisions.

Lakeshore Tours Inc., operates a large number of tours throughout the United States.A study has indicated that some of the tours are not profitable, and consideration is being given to dropping these tours in order to improve the company's overall operating performance.One such tour is a two-day Battlefields of the French and Indian Wars bus tour.An income statement from one of these tours is given below: Dropping this tour would not affect the number of buses in the company's fleet or the number of bus drivers on the company's payroll.Buses do not wear out through use; rather, they eventually become obsolete.Bus drivers are paid fixed annual salaries; tour guides are paid for each tour conducted.The "Bus maintenance and preparation" cost above is an allocation of the salaries of mechanics and other service personnel who are responsible for keeping the company's fleet of buses in good operating condition.There would be no change in the number of mechanics and other service personnel as a result of dropping this tour.The liability insurance depends upon the number of buses in the company's fleet and not upon how much they are used. Required: a.Prepare an analysis showing the financial advantage (disadvantage)if this tour is discontinued. b.The company's tour director has been criticized because only about 50% of the seats on the company's tours are being filled as compared to an average of 60% for the industry.The tour director has explained that the company's average seat occupancy could be improved considerably by eliminating about 10% of the tours, but that doing so would reduce profits.Do you agree with the tour director's conclusion? Explain your response.