Exam 6: Differential Analysis: The Key to Decision Making

Which product makes the LEAST profitable use of the milling machines?

An automated turning machine is the current constraint at Naik Corporation. Three products use this constrained resource. Data concerning those products appear below: Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized.

If management decides to buy part O13 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?

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

What is the highest price that Talboe could pay the outside supplier for each wheel and still be economically indifferent between making or buying the wheels?

Redner, 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 grinding machine is the constraint, with only 2,400 minutes of grinding machine time available this week. Required: a. Given the grinding 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 grinding machine time?

A general rule in relevant cost analysis is:

Which product makes the MOST profitable use of the milling machines?

Stampka 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 4,200 units of component JJF. Each unit of JJF requires 6 units of material O38 and 9 units of material P56. Data concerning these two materials follow: Material O38 is in use in many of the company's products and is routinely replenished. Material P56 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 JJF?

The cost of a resource that has no alternative use in a make or buy decision problem has an opportunity cost of zero.

The company has received a special, one-time-only order for 300 units of component G62. 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. Assuming that Mckerchie has excess capacity and can fill the order without cutting back on the production of any product, what is the minimum price per unit on the special order below which the company should not go?

Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized.

Joint costs are not relevant to the decision to sell a product at the split-off point or to process the product further.

The Kelsh Company has two divisions--North and South. The divisions have the following revenues and expenses: Management at Kelsh is pondering the elimination of North Division. If North Division were eliminated, its traceable fixed expenses could be avoided. The total common corporate expenses would be unaffected. Given these data, the elimination of North Division would result in an overall company net operating income of:

The constraint at Vrana Inc. is an expensive milling machine. The three products listed below use this constrained resource. Required: a. Rank the products in order of their current profitability from the most profitable to the least profitable. In other words, rank the products in the order in which they should be emphasized. Show your work! b. 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?

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

Mr. Earl Pearl, accountant for Margie Knall Co., Inc., has prepared the following product-line income data: The following additional information is available: * The factory rent of $1,500 assigned to Product C is avoidable if the product were dropped. * The company's total depreciation would not be affected by dropping C.* Eliminating Product C will reduce the monthly utility bill from $1,500 to $800.* All supervisors' salaries are avoidable.* If Product C is discontinued, the maintenance department will be able to reduce monthly expenses from $3,000 to $2,000.* Elimination of Product C will make it possible to cut two persons from the administrative staff; their combined salaries total $3,000.Required: Prepare an analysis showing whether Product C should be eliminated.

Holtrop Corporation has received a request for a special order of 9,000 units of product Z74 for $46.50 each. The normal selling price of this product is $51.60 each, but the units would need to be modified slightly for the customer. The normal unit product cost of product Z74 is computed as follows: Direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like some modifications made to product Z74 that would increase the variable costs by $6.20 per unit and that would require a one-time investment of $46,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order. Required: Determine the effect on the company's total net operating income of accepting the special order. Show your work!

The constraint at Mcglathery 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?

If Varone can expect to sell 32,000 Homs next year through regular channels, at what special order price from Fairview should Varone be economically indifferent between either accepting or not accepting this special order?