Exam 6: Differential Analysis: the Key to Decision Making

Dowchow Corporation makes two products from a common input.Joint processing costs up to the split-off point total $38, 400 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: What is the net monetary advantage (disadvantage)of processing Product X beyond the split-off point?

The management of Cackowski Corporation has been concerned for some time with the financial performance of its product I11S and has considered discontinuing it on several occasions.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 $185, 000 of the fixed manufacturing expenses and $132, 000 of the fixed selling and administrative expenses are avoidable if product I11S is discontinued. What would be the effect on the company's overall net operating income if product I11S were dropped?

The management of Cackowski Corporation has been concerned for some time with the financial performance of its product I11S and has considered discontinuing it on several occasions.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 $185, 000 of the fixed manufacturing expenses and $132, 000 of the fixed selling and administrative expenses are avoidable if product I11S is discontinued. According to the company's accounting system, what is the net operating income earned by product I11S? Include all costs in this calculation-whether relevant or not.

Tullius Corporation has received a request for a special order of 8, 000 units of product C64 for $50.00 each.The normal selling price of this product is $53.25 each, but the units would need to be modified slightly for the customer.The normal unit product cost of product C64 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 C64 that would increase the variable costs by $5.00 per unit and that would require a one-time investment of $43, 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!

Moyer 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 2, 300 units of component TIB.Each unit of TIB requires 9 units of material F58 and 7 units of material D66.Data concerning these two materials follow: Material F58 is in use in many of the company's products and is routinely replenished.Material D66 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 TIB?

A cost that is traceable to a segment through activity-based costing may or may not be an avoidable cost for decision making.

Tillison Corporation makes three products that use the current constraint which is a particular type of machine.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.

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. What is the net total dollar advantage (disadvantage)of purchasing the part rather than making it?

Lusk Corporation produces and sells 20, 000 units of Product X each month.The selling price of Product X is $30 per unit, and variable expenses are $21 per unit.A study has been made concerning whether Product X should be discontinued.The study shows that $50, 000 of the $250, 000 in fixed expenses charged to Product X would not be avoidable even if the product was discontinued.If Product X is discontinued, the company's overall net operating income would:

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

Hoang Corporation makes three products that use compound W, the current 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.

Part A42 is used by Elgin Corporation to make one of its products.A total of 16, 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 the part and sell it to the company for $30.40 each.If this offer is accepted, the supervisor's salary and all of the variable costs, including the 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.In addition, the space used to make part A42 could be used to make more of one of the company's other products, generating an additional segment margin of $23, 000 per year for that product.What would be the impact on the company's overall net operating income of buying part A42 from the outside supplier?

Part O43 is used in one of Scheetz Corporation's products.The company's Accounting Department reports the following costs of producing the 6, 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 $26.40 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 $1, 000 of these allocated general overhead costs would be avoided. Required: a.Prepare a report that shows the effect on the company's total net operating income of buying part O43 from the supplier rather than continuing to make it inside the company. b.Which alternative should the company choose?

A study has been conducted to determine if Product A should be dropped.Sales of the product total $400, 000 per year;variable expenses total $270, 000 per year.Fixed expenses charged to the product total $160, 000 per year.The company estimates that $70, 000 of these fixed expenses are not avoidable even if the product is dropped.If Product A is dropped, the company's overall net operating income would:

Farnsworth Television makes and sells portable television sets.Each television regularly sells for $200.The following cost data per television are based on a full capacity of 12, 000 televisions produced each period: A special order has been received by Farnsworth for a sale of 2, 500 televisions to an overseas customer.The only selling costs that would be incurred on this order would be $10 per television for shipping.Farnsworth is now selling 7, 200 televisions through regular distributors each period.What should be the minimum selling price per television in negotiating a price for this special order?

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. What is the contribution margin per unit on normal sales?

The Madison Corporation produces three products with the following costs and selling prices: If machine-hours is Madison's production constraint, then the ranking of the products from the most profitable to the least profitable use of the constrained resource is:

Consider the following statements: I.A division's net operating income, after deducting both traceable and allocated common fixed costs, is negative. II)The division's avoidable fixed costs exceed its contribution margin. III)The division's traceable fixed costs plus its allocated common corporate costs exceed its contribution margin. Which of the above statements is a valid reason for eliminating the division?

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. The change in the company's overall annual net operating income that would result from making the component, rather than buying it, would be:

Foster Company makes 20, 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 $51.80 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 $44, 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, $5.10 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. Required: a.How much of the unit product cost of $56.70 is relevant in the decision of whether to make or buy the part? b.What is the net total dollar advantage (disadvantage)of purchasing the part rather than making it? c.What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 20, 000 units required each year?