Exam 6: Differential Analysis: the Key to Decision Making

Claris Corporation (a multi-product company)produces and sells 7, 000 units of Product X each year.Each unit of Product X sells for $12 and has a contribution margin of $4.If Product X is discontinued, $19, 000 of the $32, 000 in fixed costs charged to Product X could be eliminated.If Product X is discontinued, the company's overall operating income would:

Tillison Corporation makes three products that use the current constraint which is a particular type of machine.Data concerning those products appear below: 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?

Duarte Corporation processes sugar beets that it purchases from farmers.Sugar beets are processed in batches.A batch of sugar beets costs $31 to buy from farmers and $15 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 $27 or processed further for $14 to make the end product industrial fiber that is sold for $44.The beet juice can be sold as is for $32 or processed further for $29 to make the end product refined sugar that is sold for $50. How much more profit (loss)does the company make by processing one batch of sugar beets into the end products industrial fiber and refined sugar?

The book value of old equipment is a relevant cost in a decision to replace that equipment.(Ignore taxes. )

Jebb's Lettuce Stand currently sells 60, 000 heads of lettuce each year for $1.00 per head.Jebb is thinking of expanding operations and serving the customer better by purchasing a "slice and dice" machine that will cut up each head of lettuce into bite-size pieces that can be used for salads.Jebb expects he will then be able to sell his lettuce for $1.70 per head.Jebb has prepared the following analysis for each option based on sales of 60, 000 heads of lettuce: Based on the information above, what will be Jebb's increase or decrease in profit for the year if he chooses to start slicing up the lettuce instead of selling it whole?

The constraint at Fulena 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?

The management of Kabanuck Corporation is considering dropping product V41B.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 $184, 000 of the fixed manufacturing expenses and $200, 000 of the fixed selling and administrative expenses are avoidable if product V41B is discontinued. What would be the effect on the company's overall net operating income if product V41B were dropped?

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

The constraint at Johngrass 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?

Hadley Inc. , makes a line of bathroom accessories.Because of a decline in sales, the company has 10, 000 machine hours of idle capacity available each year.This idle capacity could be used by the company to make, rather than buy, one of the components used in its production process.Hadley needs 5, 000 units of this component each year.At present, the component is being purchased from an outside supplier at $7.50 per unit.Variable production cost for the component would be $4.10 per unit, and additional supervisory costs would be $18, 000 per year.Already existing fixed costs that would be allocated to this part amount to $300, 000 per year. What would the annual cost of additional supervision have to be in order for Hadley to be indifferent between making or buying the component? (Assume everything else remains the same. )

Narciso Corporation is preparing a bid for a special order that would require 880 liters of material R19S.The company already has 280 liters of this raw material in stock that originally cost $6.10 per liter.Material R19S is used in the company's main product and is replenished on a periodic basis.The resale value of the existing stock of the material is $5.45 per liter.New stocks of the material can be readily purchased for $6.20 per liter.What is the relevant cost of the 880 liters of the raw material when deciding how much to bid on the special order?

Duarte Corporation processes sugar beets that it purchases from farmers.Sugar beets are processed in batches.A batch of sugar beets costs $31 to buy from farmers and $15 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 $27 or processed further for $14 to make the end product industrial fiber that is sold for $44.The beet juice can be sold as is for $32 or processed further for $29 to make the end product refined sugar that is sold for $50. Which of the intermediate products should be processed further?

Nicklin 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?

The Talbot Corporation makes wheels that it uses in the production of bicycles.Talbot's costs to produce 100, 000 wheels annually are: An outside supplier has offered to sell Talbot similar wheels for $1.25 per wheel.If the wheels are purchased from the outside supplier, $15, 000 of annual fixed overhead could be avoided and the facilities now being used could be rented to another company for $45, 000 per year.Direct labor is a variable cost. At what purchase price for the wheels would Talbot be indifferent between making or buying the wheels?

Rama Corporation is presently making part J56 that is used in one of its products.A total of 4, 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 produce and sell the part to the company for $30.80 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, none of which would be avoided if the part were purchased instead of produced internally. If management decides to buy part J56 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?

Lindon Company uses 5, 000 units of Part X each year as a component in the assembly of one of its products.The company is presently producing Part X internally at a total cost of $80, 000 as follows: An outside supplier has offered to provide Part X at a price of $13 per unit.If Lindon Company stops producing the part internally, one-third of the fixed manufacturing overhead would be eliminated. Required: Prepare an analysis showing the annual advantage or disadvantage of accepting the outside supplier's offer.

The constraint at Bonavita 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 this constrained resource?

Yehle Inc.regularly uses material Y51B and currently has in stock 460 liters of the material for which it paid $2, 530 several weeks ago.If this were to be sold as is on the open market as surplus material, it would fetch $4.55 per liter.New stocks of the material can be purchased on the open market for $5.45 per liter, but it must be purchased in lots of 1, 000 liters.You have been asked to determine the relevant cost of 720 liters of the material to be used in a job for a customer.The relevant cost of the 720 liters of material Y51B is:

Future costs that do not differ between the alternatives in a decision are avoidable costs.

Northern Stores is a retailer in the upper Midwest.The most recent monthly income statement for Northern Stores is given below: Northern is considering closing Store I.If Store I is closed, one-fourth of its traceable fixed expenses would continue.Also, the closing of Store I would result in a 20% decrease in sales in Store II.Northern allocates common fixed expenses on the basis of sales dollars and none of these costs would be saved if a store were shut down. Required: Compute the overall increase or decrease in the net operating income of Northern Stores if Store I is closed.