Exam 11: Differential Analysis: The Key to Decision Making

When a company has a production constraint,total contribution margin will be maximized by emphasizing the products with the lowest contribution margin per unit of the constrained resource.

Kosakowski Corporation processes sugar beets in batches.A batch of sugar beets costs $66 to buy from farmers and $17 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 $23 or processed further for $13 to make the end product industrial fiber that is sold for $36.The beet juice can be sold as is for $42 or processed further for $20 to make the end product refined sugar that is sold for $84.How much more profit (loss)does the company make by processing one batch of sugar beets into the end products industrial fiber and refined sugar?

In a decision to drop a segment,the opportunity cost of the space occupied by the segment is the cost of renting or building similar space nearby.

Eliminating nonproductive processing time is particularly important in work stations that do not contain bottlenecks.

Ramon Corporation makes 18,000 units of part E44 each year.This part is used in one of the company's products.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 $23.30 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 $5,000 of these allocated general overhead costs would be avoided.In addition,the space used to produce part E44 would be used to make more of one of the company's other products,generating an additional segment margin of $21,000 per year for that product. What would be the impact on the company's overall net operating income of buying part E44 from the outside supplier?

Gwinnett Barbecue Sauce Corporation manufactures a specialty barbecue sauce.Gwinnett has the capacity to manufacture and sell 10,000 cases of sauce each year but is currently only manufacturing and selling 9,000.The following costs relate to annual operations at 9,000 cases: Gwinnett normally sells its sauce for $30 per case.A local school district is interested in purchasing Gwinnett's excess capacity of 1,000 cases of sauce but only if they can get the sauce for $15 per case.This special order would not affect regular sales or total fixed costs or variable costs per unit.If this special order is accepted,Gwinnett's profits for the year will:

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?

Benjamin Signal Company produces products R,J,and C from a joint production process.Each product may be sold at the split-off point or be processed further.Joint production costs of $92,000 per year are allocated to the products based on the relative number of units produced.Data for Benjamin's operations for the current year are as follows: Product R can be processed beyond the split-off point for an additional cost of $26,000 and can then be sold for $105,000.Product J can be processed beyond the split-off point for an additional cost of $38,000 and can then be sold for $117,000.Product C can be processed beyond the split-off point for an additional cost of $12,000 and can then be sold for $57,000. Required: Which products should be processed beyond the split-off point?

Bowen Corporation produces products P,Q,and R from a joint production process.Each product may be sold at the split-off point or processed further.Joint production costs of $80,000 per year are allocated to the products based on the relative number of units produced.Data for Bowen's operations for last year follow: Required: Which products should be processed beyond the split-off point?

Albertine Co.manufactures and sells trophies for winners of athletic and other events.Its manufacturing plant has the capacity to produce 16,000 trophies each month;current monthly production is 12,800 trophies.The company normally charges $113 per trophy.Cost data for the current level of production are shown below: The company has just received a special one-time order for 1,200 trophies at $61 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?

Costs associated with two alternatives,code-named Q and R,being considered by Hunnicutt Corporation 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?

Consider the following production and cost data for two products,Q and P: A total of 24,000 machine minutes are available each period and there is unlimited demand for each product.What is the largest possible total contribution margin that can be realized each period?

The management of Fannin Corporation is considering dropping product H58S.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 $90,000 of the fixed manufacturing expenses and $42,000 of the fixed selling and administrative expenses are avoidable if product H58S is discontinued.What would be the effect on the company's overall net operating income if product H58S were dropped?

Fahringer 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.

In a factory operating at capacity,not every machine and person should be working at the maximum possible rate.

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?

Iaci Company makes two products from a common input.Joint processing costs up to the split-off point total $42,000 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: Required: a.What is the net monetary advantage (disadvantage)of processing Product X beyond the split-off point? b.What is the net monetary advantage (disadvantage)of processing Product Y beyond the split-off point? c.What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point? d.What is the minimum amount the company should accept for Product Y if it is to be sold at the split-off point?

Palinkas Cane Products,Inc. ,processes sugar cane in batches.The company buys a batch of sugar cane from farmers for $80 which is then crushed in the company's plant at a cost of $11.Two intermediate products,cane fiber and cane juice,emerge from the crushing process.The cane fiber can be sold as is for $22 or processed further for $10 to make the end product industrial fiber that is sold for $30.The cane juice can be sold as is for $41 or processed further for $27 to make the end product molasses that is sold for $101.How much more profit (loss)does the company make by processing one batch of sugar cane into the end products industrial fiber and molasses?

Joint products are products that are sold to customers as a set or as part of a group of products.

Product Q77H has been considered a drag on profits at Zenke Corporation for some time and management is considering discontinuing the product altogether.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 $71,000 of the fixed manufacturing expenses and $43,000 of the fixed selling and administrative expenses are avoidable if product Q77H is discontinued.What would be the effect on the company's overall net operating income if product Q77H were dropped?