Exam 11: Differential Analysis: The Key to Decision Making

A fixed cost cannot be a differential cost.

Oruro Chemical Corporation manufactures a variety of household cleaners,solvents,and beverages.Because of a recent shortage of mytron,a key ingredient needed for three of its products,the corporation has to decide what amount of each product would be most advantageous to produce.Information related to the three products that use mytron are shown below: Assume that Oruro only has 3,000 ounces of mytron available next month.What is the maximum amount of contribution margin that Oruro can generate next month from the three products above given the shortage of mytron?

The management of Bercegeay Corporation is considering dropping product Y25C.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 $117,000 of the fixed manufacturing expenses and $78,000 of the fixed selling and administrative expenses are avoidable if product Y25C is discontinued. Required: a.What is the net operating income earned by product Y25C according to the company's accounting system? Show your work! b.What would be the effect on the company's overall net operating income of dropping product Y25C? Should the product be dropped? Show your work!

Kerbow Corporation uses part B76 in one of its products.The company's Accounting Department reports the following costs of producing the 12,000 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 $27.40 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 $6,000 of these allocated general overhead costs would be avoided.In addition,the space used to produce part B76 could be used to make more of one of the company's other products,generating an additional segment margin of $29,000 per year for that product. Required: a.Prepare a report that shows the effect on the company's total net operating income of buying part B76 from the supplier rather than continuing to make it inside the company. b.Which alternative should the company choose?

Bulan Inc.makes a range of products.The company's predetermined overhead rate is $20 per direct labor-hour,which was calculated using the following budgeted data: Component T6 is used in one of the company's products.The unit product cost of the component according to the company's cost accounting system is determined as follows: C:\Users\user\Dropbox\Quizplus Parsing Documents\To Be Parsed\Done Farah\TB2461,Introduction to Managerial Accounting 6th Edition by Eric Noreen\Brewer_7e_PrintFile_TestBank_File\Brewer_7e_PrintFile_TestBank_File\Images\7e_BGN_CH10_TB_edit 02172015_198.png An outside supplier has offered to supply component T6 for $101 each.The outside supplier is known for quality and reliability.Assume that direct labor is a variable cost,variable manufacturing overhead is really driven by direct labor-hours,and total fixed manufacturing overhead would not be affected by this decision.Bulan chronically has idle capacity. Required: Is the offer from the outside supplier financially attractive? Why?

Tish Corporation produces a part used in the manufacture of one of its products.The unit product cost is $26,computed as follows: An outside supplier has offered to provide the annual requirement of 5,000 of the parts for only $21 each.The company estimates that 75% of the fixed manufacturing overhead cost above could be eliminated if the parts are purchased from the outside supplier.Assume that direct labor is an avoidable cost in this decision.Based on these data,the per-unit dollar advantage or disadvantage of purchasing from the outside supplier would be:

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:

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?

Fabio Corporation is considering eliminating a department that has a contribution margin of $30,000 and $60,000 in fixed costs.Of the fixed costs,$15,000 cannot be avoided.The effect of eliminating this department on Fabio's overall net operating income would be:

The term joint cost is used to describe the costs incurred after the split-off point in a process involving joint products.

Adamyan Co.manufactures and sells medals for winners of athletic and other events.Its manufacturing plant has the capacity to produce 15,000 medals each month;current monthly production is 12,750 medals.The company normally charges $120 per medal.Cost data for the current level of production are shown below: The company has just received a special one-time order for 700 medals at $83 each.For this particular order,no variable selling and administrative costs would be incurred.This order would also have no effect on fixed costs. Required: Should the company accept this special order? Why?

A customer has requested that Gamba Corporation fill a special order for 3,000 units of product Q41 for $25.00 a unit.While the product would be modified slightly for the special order,product Q41's normal unit product cost is $21.40: 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 modifications made to product Q41 that would increase the variable costs by $7.00 per unit and that would require an investment of $15,000 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.If the special order is accepted,the company's overall net operating income would increase (decrease)by:

Nicklin Corporation is considering two alternatives that are code-named M and N.Costs associated with the alternatives are listed below: Required: a.Which costs are relevant and which are not relevant in the choice between these two alternatives? b.What is the differential cost between the two alternatives?

When a multi-product factory operates at full capacity,decisions must be made about which products to emphasize.In making such decisions,products should be ranked based on:

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?

Zuppa Corporation currently maintains its own printing department.The annual costs of running this department are as follows: Somatic Copy Service has offered to provide Zuppa with all of its printing needs at a total annual cost of $68,000.If Zuppa went with this offer,they would close down their printing department.Except for 30% of the fixed costs,all of the annual printing department costs above can be avoided if it was closed down.Based on this information,would Zuppa be better off to keep its printing department or to shut it down and take Somatic's offer and by how much?

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:

A vertically integrated company is more dependent on its suppliers than a company that is not vertically integrated.

The split-off point in a process that produces joint products is the point in the manufacturing process at which the joint products are sent to separate customers.

Kampmann Corporation is presently making part Z95 that is used in one of its products.A total of 5,000 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 and sell the part to the company for $24.10 each.If this offer is accepted,the supervisor's salary and all of the variable costs 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.If management decides to buy part Z95 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?