Exam 6: Differential Analysis: the Key to Decision Making

Gierlach Beet Processors Inc. , processes sugar beets in batches.A batch of sugar beets costs $27 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 $27 or processed further for $14 to make the end product industrial fiber that is sold for $34.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 $58.How much more profit (loss)does the company make by processing the intermediate product beet juice into refined sugar rather than selling it as is?

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. According to the company's accounting system, what is the net operating income earned by product V41B? Include all costs in this calculation-whether relevant or not.

Ramon Corporation makes 18, 000 units of part E44 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 $23.30 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 $5, 000 of these allocated general overhead costs would be avoided.In addition, the space used to produce part E44 would be used to make more of one of the company's other products, generating an additional segment margin of $21, 000 per year for that product. What would be the impact on the company's overall net operating income of buying part E44 from the outside supplier?

Crane Corporation makes four products in a single facility.Data concerning these products appear below: The milling machines are potentially the constraint in the production facility.A total of 22, 600 minutes are available per month on these machines. Which product makes the LEAST profitable use of the milling machines?

Paulsen Corporation makes two products, W and P, in a joint process.At the split-off point, 50, 000 units of W and 60, 000 units of P are available each month.Monthly joint production costs are $290, 000.Product W can be sold at the split-off point for $5.60 per unit.Product P either can be sold at the split-off point for $4.75 per unit or it can be further processed and sold for $7.20 per unit.If P is processed further, additional processing costs of $3.10 per unit will be incurred. If P is processed further and then sold, rather than being sold at the split-off point, the change in monthly net operating income would be a:

Two products, LB and NH, emerge from a joint process.Product LB has been allocated $30, 800 of the total joint costs of $44, 000.A total of 2, 000 units of product LB are produced from the joint process.Product LB can be sold at the split-off point for $13 per unit, or it can be processed further for an additional total cost of $14, 000 and then sold for $15 per unit.If product LB is processed further and sold, what would be the effect on the overall profit of the company compared with sale in its unprocessed form directly after the split-off point?

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

The management of Fannin Corporation is considering dropping product H58S.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 $90, 000 of the fixed manufacturing expenses and $42, 000 of the fixed selling and administrative expenses are avoidable if product H58S is discontinued.What would be the effect on the company's overall net operating income if product H58S were dropped?

Paulsen Corporation makes two products, W and P, in a joint process.At the split-off point, 50, 000 units of W and 60, 000 units of P are available each month.Monthly joint production costs are $290, 000.Product W can be sold at the split-off point for $5.60 per unit.Product P either can be sold at the split-off point for $4.75 per unit or it can be further processed and sold for $7.20 per unit.If P is processed further, additional processing costs of $3.10 per unit will be incurred. What would the selling price per unit of Product P need to be after processing in order for Paulsen Corporation to be economically indifferent between selling P at the split-off point or processing P further?

Benjamin Signal Company produces products R, J, and C from a joint production process.Each product may be sold at the split-off point or be processed further.Joint production costs of $92, 000 per year are allocated to the products based on the relative number of units produced.Data for Benjamin's operations for the current year are as follows: Product R can be processed beyond the split-off point for an additional cost of $26, 000 and can then be sold for $105, 000.Product J can be processed beyond the split-off point for an additional cost of $38, 000 and can then be sold for $117, 000.Product C can be processed beyond the split-off point for an additional cost of $12, 000 and can then be sold for $57, 000. Required: Which products should be processed beyond the split-off point?

Only future costs that differ between alternatives are relevant in decision making.

Wenig Inc.has some material that originally cost $73, 500.The material has a scrap value of $45, 600 as is, but if reworked at a cost of $6, 600, it could be sold for $58, 100.What would be the incremental effect on the company's overall profit of reworking and selling the material rather than selling it as is as scrap?

One of the advantages of allocating common fixed costs to a product is that such allocations more accurately reflect the product's true profitability.

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 the intermediate product beet juice into refined sugar rather than selling it as is?

Mankus Inc.is considering using stocks of an old raw material in a special project.The special project would require all 120 kilograms of the raw material that are in stock and that originally cost the company $816 in total.If the company were to buy new supplies of this raw material on the open market, it would cost $7.25 per kilogram.However, the company has no other use for this raw material and would sell it at the discounted price of $6.75 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 $50 for all 120 kilograms.What is the relevant cost of the 120 kilograms of the raw material when deciding whether to proceed with the special project?

Eley Corporation produces a single product.The cost of producing and selling a single unit of this product at the company's normal activity level of 40, 000 units per month is as follows: The normal selling price of the product is $86.10 per unit. An order has been received from an overseas customer for 2, 000 units to be delivered this month at a special discounted price.This order would not change the total amount of the company's fixed costs.The variable selling and administrative expense would be $1.20 less per unit on this order than on normal sales. Direct labor is a variable cost in this company. Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $76.40 per unit.By how much would this special order increase (decrease)the company's net operating income for the month?

The most recent monthly income statement for Kennaman Stores is given below: Kennaman is considering closing Store I.If Store I is closed, one-fourth of its traceable fixed expenses would continue unchanged.Also, the closing of Store I would result in a 20% decrease in sales in Store II.Kennaman allocates common fixed expenses on the basis of sales dollars. Required: Compute the overall increase or decrease in Kennaman's net operating income if Store I is closed.

Lafoe Corporation produces two intermediate products, A and B, from a common input.Intermediate product A can be further processed into end product X.Intermediate product B can be further processed into Product Y.The common input is purchased in batches that cost $40 each and the cost of processing a batch to produce intermediate products A and B is $18.Intermediate product A can be sold as is for $28 or processed further for $19 to make Product X that is sold for $50.Intermediate product B can be sold as is for $30 or processed further for $21 to make product Y that is sold for $49. Required: a.Assuming that no other costs are involved in processing the common input or in selling products, what is the profit (loss)from processing one batch of the common input into the products X and Y? Show your work! b.Should each of the intermediate products, A and B, be sold as is or processed further? Explain.

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 MOST profitable use of the grinding machines?

Hanson Inc. , makes 1, 000 units per year of a part called a prositron for use in one of its products.Data concerning the unit production costs of the prositron follow: An outside supplier has offered to sell Hanson, Inc.all of the prositrons it requires.If Hanson, Inc.decided to discontinue making the prositrons, 10% of the above fixed manufacturing overhead costs could be avoided. Required: a.Assume Hanson, Inc.has no alternative use for the facilities presently devoted to production of the prositrons.If the outside supplier offers to sell the prositrons for $850 each, should Hanson, Inc.accept the offer? Fully support your answer with appropriate calculations. b.Assume that Hanson, Inc.could use the facilities presently devoted to production of the prositrons to expand production of another product that would yield an additional contribution margin of $50, 000 annually.What is the maximum price Hanson, Inc.should be willing to pay the outside supplier for prositrons?