Exam 6: Differential Analysis: the Key to Decision Making

Bosques Corporation has in stock 35, 800 kilograms of material L that it bought five years ago for $5.55 per kilogram.This raw material was purchased to use in a product line that has been discontinued.Material L can be sold as is for scrap for $1.67 per kilogram.An alternative would be to use material L in one of the company's current products, Q08C, which currently requires 2 kilograms of a raw material that is available for $9.15 per kilogram.Material L can be modified at a cost of $0.78 per kilogram so that it can be used as a substitute for this material in the production of product Q08C.However, after modification, 4 kilograms of material L is required for every unit of product Q08C that is produced.Bosques Corporation has now received a request from a company that could use material L in its production process.Assuming that Bosques Corporation could use all of its stock of material L to make product Q08C or the company could sell all of its stock of the material at the current scrap price of $1.67 per kilogram, what is the minimum acceptable selling price of material L to the company that could use material L in its own production process?

Kosakowski Corporation processes sugar beets in batches.A batch of sugar beets costs $66 to buy from farmers and $17 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 $23 or processed further for $13 to make the end product industrial fiber that is sold for $36.The beet juice can be sold as is for $42 or processed further for $20 to make the end product refined sugar that is sold for $84.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?

Barrus Corporation makes 30, 000 motors to be used in the productions of its power lawn mowers.The average cost per motor at this level of activity is as follows: This motor has recently become available from an outside supplier for $25 per motor.If Barrus decides not to make the motors, none of the fixed manufacturing overhead would be avoidable and there would be no other use for the facilities.If Barrus decides to continue making the motor, how much higher or lower will the company's net operating income be than if the motors are purchased from the outside supplier? Assume that direct labor is a variable cost in this company.

Costabile Corporation is considering dropping product G41O.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 $117, 000 of the fixed manufacturing expenses and $46, 000 of the fixed selling and administrative expenses are avoidable if product G41O is discontinued. Required: a.According to the company's accounting system, what is the net operating income earned by product G41O? Show your work! b.What would be the effect on the company's overall net operating income of dropping product G41O? Should the product be dropped? Show your work!

A fixed cost cannot be a differential cost.

Kerbow Corporation uses part B76 in one of its products.The company's Accounting Department reports the following costs of producing the 12, 000 units of the part that are needed every year. An outside supplier has offered to make the part and sell it to the company for $27.40 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 $6, 000 of these allocated general overhead costs would be avoided.In addition, the space used to produce part B76 could be used to make more of one of the company's other products, generating an additional segment margin of $29, 000 per year for that product. Required: a.Prepare a report that shows the effect on the company's total net operating income of buying part B76 from the supplier rather than continuing to make it inside the company. b.Which alternative should the company choose?

Zemlya Corporation currently records $4, 000 of depreciation each year on the computer that it uses for its major data processing needs.The computer currently has one more year of useful life left and it will have a salvage value of zero at the end of that year.Jennifer, one of the accountants at Zemlya, suggested that the computer be sold immediately for $3, 000 and that the company hire a data processing firm to handle the corporation's data processing needs.The computer currently requires $25, 000 in annual operating costs in addition to the depreciation.The data processing firm would charge $10, 000 per year for its services.If Zemlya decides to implement this change, what effect will this have on the corporation's net cash flow for the last year of the computer's useful life?

Teich Inc.is considering whether to continue to make a component or to buy it from an outside supplier.The company uses 15, 000 of the components each year.The unit product cost of the component according to the company's absorption cost accounting system is given as follows: Assume that direct labor is a variable cost.Of the fixed manufacturing overhead, 10% is avoidable if the component were bought from the outside supplier;the remainder is not avoidable.In addition, making the component uses 3 minutes on the machine that is the company's current constraint.If the component were bought, time would be freed up for use on another product that requires 6 minutes on this machine and that has a contribution margin of $8.10 per unit. When deciding whether to make or buy the component, what cost of making the component should be compared to the price of buying the component?

Wehn Refiners Inc. , processes sugar cane that it purchases from farmers.Sugar cane is processed in batches.A batch of sugar cane costs $40 to buy from farmers and $13 to crush in the company's plant.Two intermediate products, cane fiber and cane juice, emerge from the crushing process.The cane fiber can be sold as is for $28 or processed further for $18 to make the end product industrial fiber that is sold for $37.The cane juice can be sold as is for $31 or processed further for $25 to make the end product molasses that is sold for $66. How much more profit (loss)does the company make by processing one batch of sugar cane into the end products industrial fiber and molasses?

Consider the following production and cost data for two products, Q and P: A total of 24, 000 machine minutes are available each period and there is unlimited demand for each product.What is the largest possible total contribution margin that can be realized each period?

Aholt Corporation makes 40, 000 units per year of a part it uses in the products it manufactures.The unit product cost of this part is computed as follows: An outside supplier has offered to sell the company all of these parts it needs for $46.20 a unit.If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand.The additional contribution margin on this other product would be $264, 000 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided.However, $21.90 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier.This fixed manufacturing overhead cost would be applied to the company's remaining products. How much of the unit product cost of $59.90 is relevant in the decision of whether to make or buy the part?

Opportunity costs are not usually recorded in the accounts of a business.

Wehn Refiners Inc. , processes sugar cane that it purchases from farmers.Sugar cane is processed in batches.A batch of sugar cane costs $40 to buy from farmers and $13 to crush in the company's plant.Two intermediate products, cane fiber and cane juice, emerge from the crushing process.The cane fiber can be sold as is for $28 or processed further for $18 to make the end product industrial fiber that is sold for $37.The cane juice can be sold as is for $31 or processed further for $25 to make the end product molasses that is sold for $66. Which of the intermediate products should be processed further?

Arenz Corporation processes sugar cane in batches.The company purchases a batch of sugar cane for $53 from farmers and then crushes the cane in the company's plant at the cost of $15.Two intermediate products, cane fiber and cane juice, emerge from the crushing process.The cane fiber can be sold as is for $24 or processed further for $18 to make the end product industrial fiber that is sold for $40.The cane juice can be sold as is for $41 or processed further for $25 to make the end product molasses that is sold for $72.Which of the intermediate products should be processed further?

Opportunity costs are:

When a company has a production constraint, total contribution margin will be maximized by emphasizing the products with the lowest contribution margin per unit of the constrained resource.

Two alternatives, code-named X and Y, are under consideration at Brahler Corporation.Costs associated with the alternatives are listed below. 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. )

Brown Corporation makes four products in a single facility.These products have the following unit product costs: Additional data concerning these products are listed below. The grinding machines are potentially the constraint in the production facility.A total of 10, 500 minutes are available per month on these machines. Direct labor is a variable cost in this company. Which product makes the LEAST profitable use of the grinding machines?

Albertine Co.manufactures and sells trophies for winners of athletic and other events.Its manufacturing plant has the capacity to produce 16, 000 trophies each month;current monthly production is 12, 800 trophies.The company normally charges $113 per trophy.Cost data for the current level of production are shown below: The company has just received a special one-time order for 1, 200 trophies at $61 each.For this particular order, no variable selling and administrative costs would be incurred.This order would also have no effect on fixed costs. Required: Should the company accept this special order? Why?

Bowen Corporation produces products P, Q, and R from a joint production process.Each product may be sold at the split-off point or processed further.Joint production costs of $80, 000 per year are allocated to the products based on the relative number of units produced.Data for Bowen's operations for last year follow: Required: Which products should be processed beyond the split-off point?