Exam 11: Differential Analysis: The Key to Decision Making

Globe Manufacturing Company has just obtained a request for a special order of 12,000 units to be shipped at the end of the current year at a discount price of $7.00 each.The company has a production capacity of 90,000 units per year.At present,Globe is only selling 80,000 units per year through regular channels at a selling price of $11.00 each.Globe's per unit costs at an 80,000 unit level of production and sales are as follows: Variable selling and administrative expense will drop to $0.30 per unit on the special order units.The special order has to be taken in its entirety.This means that by accepting the special order,Globe will be forced to not sell 2,000 units to its regular customers. Required: If Globe accepts this special order,by what amount will its net operating income increase or decrease? SHOW YOUR COMPUTATIONS.

Hal currently works as the fry guy at Burger Haven but is thinking of quitting his job to attend college full time next semester.Which of the following would be considered an opportunity cost of attending college?

The most recent monthly income statement for Kennaman Stores is given below: Kennaman is considering closing Store I.If Store I is closed,one-fourth of its traceable fixed expenses would continue unchanged.Also,the closing of Store I would result in a 20% decrease in sales in Store II.Kennaman allocates common fixed expenses on the basis of sales dollars. Required: Compute the overall increase or decrease in Kennaman's net operating income if Store I is closed.

Barrus Corporation makes 30,000 motors to be used in the productions of its power lawn mowers.The average cost per motor at this level of activity is as follows: This motor has recently become available from an outside supplier for $25 per motor.If Barrus decides not to make the motors,none of the fixed manufacturing overhead would be avoidable and there would be no other use for the facilities.If Barrus decides to continue making the motor,how much higher or lower will the company's net operating income be than if the motors are purchased from the outside supplier? Assume that direct labor is a variable cost in this company.

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

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.

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.

Hanson,Inc.makes 1,000 units per year of a part called a prositron for use in one of its products.Data concerning the unit production costs of the prositron follow: An outside supplier has offered to sell Hanson,Inc.all of the prositrons it requires.If Hanson,Inc.decided to discontinue making the prositrons,10% of the above fixed manufacturing overhead costs could be avoided. Required: a.Assume Hanson,Inc.has no alternative use for the facilities presently devoted to production of the prositrons.If the outside supplier offers to sell the prositrons for $850 each,should Hanson,Inc.accept the offer? Fully support your answer with appropriate calculations. b.Assume that Hanson,Inc.could use the facilities presently devoted to production of the prositrons to expand production of another product that would yield an additional contribution margin of $50,000 annually.What is the maximum price Hanson,Inc.should be willing to pay the outside supplier for prositrons?

A study has been conducted to determine if one of the departments in Barry Corporation should be discontinued.The contribution margin in the department is $60,000 per year.Fixed expenses charged to the department are $75,000 per year.It is estimated that $34,000 of these fixed expenses could be eliminated if the department is discontinued.These data indicate that if the department is discontinued,the company's overall net operating income would:

Manico Corporation produces three products -- X,Y,& Z -- with the following characteristics: The company has only 2,000 machine-hours available each month.If demand exceeds the company's capacity,in what sequence should orders be filled if the company wants to maximize its total contribution margin?

Tullius Corporation has received a request for a special order of 8,000 units of product C64 for $50.00 each.The normal selling price of this product is $53.25 each,but the units would need to be modified slightly for the customer.The normal unit product cost of product C64 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 C64 that would increase the variable costs by $5.00 per unit and that would require a one-time investment of $43,000 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!

Fixed costs may or may not be sunk costs.

A disadvantage of vertical integration is that by pooling demand for parts from a number of companies,a supplier will face diseconomies of scale that result in lower quality and higher cost than if every company makes its own parts.

The book value of old equipment is a relevant cost in a decision to replace that equipment.(Ignore taxes. )