Exam 11: Differential Analysis: The Key to Decision Making

Juett Company produces a single product.The cost of producing and selling a single unit of this product at the company's normal activity level of 70,000 units per month is as follows: The normal selling price of the product is $72.90 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 have no effect on the company's normal sales and would not change the total amount of the company's fixed costs.The variable selling and administrative expense would be $1.10 less per unit on this order than on normal sales. Direct labor is a variable cost in this company. Required: a.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 $66.10 per unit.By how much would this special order increase (decrease)the company's net operating income for the month? b.Suppose the company is already operating at capacity when the special order is received from the overseas customer.What would be the opportunity cost of each unit delivered to the overseas customer? c.Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 1,300 units for regular customers.What would be the minimum acceptable price per unit for the special order?

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

A customer has asked Goes Corporation to supply 6,000 units of product Y19,with some modifications,for $31.30 each.The normal selling price of this product is $46.50 each.The normal unit product cost of product Y19 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 Y19 that would increase the variable costs by $8.90 per unit and that would require a one-time investment of $20,000 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!

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. )

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?

In a special order situation,any fixed cost that could be avoided if the special order were not accepted would be irrelevant.

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?

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:

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.

Fixed costs may or may not be relevant in decisions about whether a product should be dropped.

Weston Corporation is considering eliminating a department that has a contribution margin of $70,000 and $140,000 in fixed costs.Of the fixed costs,$100,000 cannot be avoided.The effect of eliminating this department on Weston's overall net operating income would be:

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?

In a decision to drop a product,the product should not be charged for factory rent if the space in which the product is produced has no alternative use and the rental payment is unavoidable.

In a sell or process further decision,which of the following costs is relevant? I.A variable production cost incurred after split-off. II)A fixed production cost incurred prior to split-off.

Gary Corporation produces products X,Y,and Z from a single raw material input.Budgeted data for the next month is as follows: If the cost of raw material input is $150,000,which of the products should be processed beyond the split-off point?

Management is considering a one-time-only special order.There is sufficient idle capacity to fill the order without affecting any normal sales.Which one of the following is NOT relevant in making the decision?

Bowdish Corporation purchases potatoes from farmers.The potatoes are then peeled,producing two intermediate products-peels and depeeled spuds.The peels can then be processed further to make a cocktail of organic nutrients.And the depeeled spuds can be processed further to make frozen french fries.A batch of potatoes costs $37 to buy from farmers and $14 to peel in the company's plant.The peels produced from a batch can be sold as is for animal feed for $22 or processed further for $13 to make the cocktail of nutrients that are sold for $40.The depeeled spuds can be sold as is for $37 or processed further for $21 to make frozen french fries that are sold for $53. Required: a.Assuming that no other costs are involved in processing potatoes or in selling products,how much money does the company make from processing one batch of potatoes into the cocktail of organic nutrients and frozen french fries? Show your work! b.Should each of the intermediate products,peels and depeeled spuds,be sold as is or processed further into an end product? Explain.

Holt Company makes three products in a single facility.Data concerning these products follow: The mixing machines are potentially the constraint in the production facility.A total of 25,800 minutes are available per month on these machines. Direct labor is a variable cost in this company. Required: a.How many minutes of mixing machine time would be required to satisfy demand for all three products? b.How much of each product should be produced to maximize net operating income? (Round off to the nearest whole unit. ) c.Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity? (Round off to the nearest whole cent. )

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:

When a company is involved in only one activity in the entire value chain,it is vertically integrated.