Exam 6: Differential Analysis: The Key to Decision Making

How much profit (loss) does the company make by processing one batch of sugar cane into the end products industrial fiber and molasses?

What would be the effect on the company's overall net operating income if product C11B were dropped?

Product R19N has been considered a drag on profits at Buzzeo Corporation for some time and management is considering discontinuing the product altogether. Data from the company's accounting system appear below: In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $49,000 of the fixed manufacturing expenses and $30,000 of the fixed selling and administrative expenses are avoidable if product R19N is discontinued. What would be the effect on the company's overall net operating income if product R19N were dropped?

What is the net monetary advantage (disadvantage) of processing Product Y beyond the split-off point?

Marcell Corporation is considering two alternatives that are code-named M and N. Costs associated with the alternatives are listed below: Required: a. Which costs are relevant and which are not relevant in the choice between these two alternatives? b. What is the differential cost between the two alternatives?

Peluso Company, a manufacturer of snowmobiles, is operating at 70% of plant capacity. Peluso's plant manager is considering making the headlights now being purchased from an outside supplier for $11 each. The Peluso plant has idle equipment that could be used to manufacture the headlights. The design engineer estimates that each headlight requires $4 of direct materials, $3 of direct labor, and $6.00 of manufacturing overhead. Forty percent of the manufacturing overhead is a fixed cost that would be unaffected by this decision. A decision by Peluso Company to manufacture the headlights should result in a net gain (loss) for each headlight of:

Assume that there is no other use for the capacity now being used to produce the component and the total fixed manufacturing overhead of the company would be unaffected by this decision. If Rodgers Company purchases the components rather than making them internally, what would be the impact on the company's annual net operating income?

Prevatte 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 $45 to buy from farmers and $11 to peel in the company's plant. The peels produced from a batch can be sold as is for animal feed for $27 or processed further for $16 to make the cocktail of nutrients that are sold for $47. The depeeled spuds can be sold as is for $38 or processed further for $27 to make frozen french fries that are sold for $59. 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.

Liffick Corporation is a specialty component manufacturer with idle capacity. Management would like to use its extra capacity to generate additional profits. A potential customer has offered to buy 6,200 units of component VFG. Each unit of VFG requires 8 units of material C79 and 6 units of material X70. Data concerning these two materials follow: Material C79 is in use in many of the company's products and is routinely replenished. Material X70 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up. What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product VFG?

Harris Corp. manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $200,000 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: The "Further Processing Costs" consist of variable and avoidable fixed costs. Required: Which product or products should be sold at the split-off point, and which product or products should be processed further? Show computations.

Iaukea Company makes two products from a common input. Joint processing costs up to the split-off point total $49,600 a year. The company allocates these costs to the joint products on the basis of their total sales values at the split-off point. Each product may be sold at the split-off point or processed further. Data concerning these products appear below: Required: a. What is the net monetary advantage (disadvantage) of processing Product X beyond the split-off point? b. What is the net monetary advantage (disadvantage) of processing Product Y beyond the split-off point? c. What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point? d. What is the minimum amount the company should accept for Product Y if it is to be sold at the split-off point?

Ethridge Corporation is presently making part H25 that is used in one of its products. A total of 9,000 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 and sell the part to the company for $15.40 each. If this offer is accepted, the supervisor's salary and all of the variable costs 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 H25 from the outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income?

What is the lowest selling price per unit that could be charged for the new cabinets from the following list and still make it economically desirable to add the new product line?

The management of Rodarmel Corporation is considering dropping product G91Q. 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 $57,000 of the fixed manufacturing expenses and $40,000 of the fixed selling and administrative expenses are avoidable if product G91Q is discontinued. Required: a. What is the net operating income earned by product G91Q according to the company's accounting system? Show your work! b. What would be the effect on the company's overall net operating income of dropping product G91Q? Should the product be dropped? Show your work!

If by dropping a product a firm can avoid more in fixed costs than it loses in contribution margin, then the firm is better off economically if the product is dropped.

Beilke Corporation processes sugar beets in batches that it purchases from farmers for $53 a batch. A batch of sugar beets costs $12 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 $20 or processed further for $10 to make the end product industrial fiber that is sold for $26. The beet juice can be sold as is for $30 or processed further for $29 to make the end product refined sugar that is sold for $79. Which of the intermediate products should be processed further?

If the new product is added next year, the increase in net operating income resulting from this decision would be:

If Dunford has a limit of 20,000 direct labor hours but no limit on units sold or machine hours, then the ranking of the products from the most profitable to the least profitable use of the constrained resource is:

Which of the intermediate products should be processed further?

Are the materials costs and processing costs relevant in the choice between alternatives A and B? (Ignore the equipment rental and occupancy costs in this question.)