Exam 11: Differential Analysis: The Key to Decision Making

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?

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?

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?

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.

Consider the following production and cost data for two products,L and C: The company can only perform 65,000 machine set-ups each period due to limited skilled labor and there is unlimited demand for each product.What is the largest possible total contribution margin that can be realized each period?

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

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?

Two or more products produced from a common input are called:

Roddey 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 2,900 units of component GEE.Each unit of GEE requires 3 units of material R39 and 8 units of material I59.Data concerning these two materials follow: Material R39 is in use in many of the company's products and is routinely replenished.Material I59 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 GEE?

The following information relates to next year's projected operating results of the Consumer Division of Xampa Corporation: If the Consumer Division is eliminated,$1,600,000 of the above fixed expenses could be avoided.What will be the effect on Xampa's profit next year if Consumer Division is eliminated?

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?

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?

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?

Falsetta Corporation makes three products that use the current constraint,which is a particular type of machine.Data concerning those products appear below: Required: a.Rank the products in order of their current profitability from the most profitable to the least profitable.In other words,rank the products in the order in which they should be emphasized.Show your work! b.Assume that sufficient constraint time is available to satisfy demand for all but the least profitable product.Up to how much should the company be willing to pay to acquire more of the constrained resource?

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

The constraint at Johngrass Corporation is time on a particular machine.The company makes three products that use this machine.Data concerning those products appear below: Assume that sufficient time is available on the constrained machine to satisfy demand for all but the least profitable product.Up to how much should the company be willing to pay to acquire more of the constrained resource?

Lindon Company uses 5,000 units of Part X each year as a component in the assembly of one of its products.The company is presently producing Part X internally at a total cost of $80,000 as follows: An outside supplier has offered to provide Part X at a price of $13 per unit.If Lindon Company stops producing the part internally,one-third of the fixed manufacturing overhead would be eliminated. Required: Prepare an analysis showing the annual advantage or disadvantage of accepting the outside supplier's offer.

Depreciation expense on existing factory equipment is usually irrelevant in a decision of whether to accept or reject a special offer for a company's product.

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

The management of Leinberger Corporation is considering dropping product S48J.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 $28,000 of the fixed manufacturing expenses and $21,000 of the fixed selling and administrative expenses are avoidable if product S48J is discontinued. Required: What would be the effect on the company's overall net operating income if product S48J were dropped? Should the product be dropped? Show your work!