Exam 6: Differential Analysis: the Key to Decision Making

Hermenegildo Corporation is presently making part P42 that is used in one of its products.A total of 10, 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 $23.90 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 $4, 000 of these allocated general overhead costs would be avoided. If management decides to buy part P42 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?

Which of the following is not an effective way of dealing with a production constraint (i.e. , bottleneck)?

The Milham Corporation has two divisions-East and West.The divisions have the following revenues and expenses: Management at Milham is considering the elimination of the West Division.If the West Division were eliminated, its traceable fixed costs could be avoided.Total common corporate costs would be unaffected by this decision.Given these data, the elimination of the West Division would result in an overall company net operating income of:

The Molis Corporation has the capacity to produce 15, 000 haks each month.Current regular production and sales are 10, 000 haks per month at a selling price of $15 each.Based on this level of activity, the following unit costs are incurred: The fixed costs, both manufacturing and administrative, are constant in total within the relevant range of 10, 000 to 15, 000 haks per month.Direct labor is a variable cost. The Molis Corporation has received a special order from a customer who wants to pay a reduced price of $10 per hak.There would be no selling expense in connection with this special order.And, this order would have no effect on the company's other sales. Suppose the special order is for 4, 000 haks this month.If this offer is accepted by Molis, the company's operating income for the month will:

In a make-or-buy decision, relevant costs include:

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 the intermediate product cane juice into molasses rather than selling it as is?

A product whose revenues do not cover the sum of its variable costs, its traceable fixed costs, and its allocated share of general corporate administrative expenses should usually be dropped.

Fixed costs may or may not be sunk costs.

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: Assume that Jebb is currently selling only 50, 000 heads of lettuce per year instead of 60, 000.Under this scenario, 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?

Defective units should be detected and scrapped or reworked before the bottleneck operation rather than after it.

Crooks Corporation processes sugar beets in batches that it purchases from farmers for $57 a batch.A batch of sugar beets costs $12 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 $28 or processed further for $17 to make the end product industrial fiber that is sold for $67.The beet juice can be sold as is for $39 or processed further for $24 to make the end product refined sugar that is sold for $54.Which of the intermediate products should be processed further?

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: 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.

Mitchener Corp.manufactures three products from a common input in a joint processing operation.Joint processing costs up to the split-off point total $300, 000 per year.The company allocates these costs to the joint products on the basis of their total sales value at the split-off point. Each product may be sold at the split-off point or processed further.The additional processing costs and sales value after further processing for each product (on an annual basis)are: Required: Which product or products should be sold at the split-off point, and which product or products should be processed further? Show computations.

The Flint Fan Corporation is considering the addition of a new model fan, the F-27, to its current products.The expected cost and revenue data for the F-27 fan are as follows: If the F-27 is added as a new product, it is expected that the contribution margin of other products will drop by $7, 000 per year. At what selling price would the new product be just breaking even?

The book value of a machine, as shown on the balance sheet, is not relevant in a decision concerning the replacement of that machine by another machine.(Ignore taxes. )

One way to increase the effective utilization of a bottleneck is to put less emphasis on preventing defects and simply discard defective units at final inspection before sending them to customers.

Joint costs are relevant in the decision to sell a product at the split-off point or to process the product further.

Part S00 is used in one of Morsey Corporation's products.The company makes 6, 000 units of this part each 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 this part and sell it to the company for $16.10 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. If management decides to buy part S00 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?

Dockwiller Inc.manufactures industrial components.One of its products, which is used in the construction of industrial air conditioners, is known as D53.Data concerning this product are given below: The above per unit data are based on annual production of 8, 000 units of the component.Direct labor is a variable cost. The company has received a special, one-time-only order for 500 units of component D53.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 Dockwiller has excess capacity and can fill the order without cutting back on the production of any product, what is the minimum price per unit below which the company should not accept the special order?

The Madison Corporation produces three products with the following costs and selling prices: If Madison has a limit of 15, 000 machine hours but no limit on direct labor hours, then the ranking of the products from the most profitable to the least profitable use of the constrained resource is: