Exam 11: Differential Analysis: The Key to Decision Making

The constraint at Dalbey 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 this constrained resource?

Talboe Company makes wheels which it uses in the production of children's wagons. Talboe's costs to produce 200,000 wheels annually are as follows: An outside supplier has offered to sell Talboe similar wheels for $0.80 per wheel. If the wheels are purchased from the outside supplier, $25,000 of annual fixed manufacturing overhead would be avoided and the facilities now being used to make the wheels would be rented to another company for $55,000 per year. -If Talboe chooses to buy the wheel from the outside supplier,then the change in annual net operating income is a:

A general rule in relevant cost analysis is:

The management of Fries Corporation has been concerned for some time with the financial performance of its product R89H and has considered discontinuing it on several occasions. 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 $31,000 of the fixed manufacturing expenses and $46,000 of the fixed selling and administrative expenses are avoidable if product R89H is discontinued. -According to the company's accounting system,what is the net operating income earned by product R89H?

Dodrill Company makes two products from a common input. Joint processing costs up to the split-off point total $43,200 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: -What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point?

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

Two products,IF and RI,emerge from a joint process.Product IF has been allocated $25,300 of the total joint costs of $46,000.A total of 2,000 units of product IF are produced from the joint process.Product IF can be sold at the split-off point for $11 per unit,or it can be processed further for an additional total cost of $10,000 and then sold for $13 per unit.If product IF 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?

Coakley Beet Processors,Inc. ,processes sugar beets in batches.A batch of sugar beets costs $48 to buy from farmers and $10 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 $24 or processed further for $16 to make the end product industrial fiber that is sold for $36.The beet juice can be sold as is for $44 or processed further for $28 to make the end product refined sugar that is sold for $70.How much profit (loss)does the company make by processing the intermediate product beet juice into refined sugar rather than selling it as is?

The management of Therriault Corporation is considering dropping product U51Y.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 $280,000 of the fixed manufacturing expenses and $140,000 of the fixed selling and administrative expenses are avoidable if product U51Y is discontinued. Required: What would be the effect on the company's overall net operating income if product U51Y were dropped? Should the product be dropped? Show your work!

The Rodgers Company makes 27,000 units of a certain component each year for use in one of its products. The cost per unit for the component at this level of activity is as follows: Rodgers has received an offer from an outside supplier who is willing to provide 27,000 units of this component each year at a price of $25 per component. Assume that direct labor is a variable cost. None of the fixed manufacturing overhead would be avoidable if this component were purchased from the outside supplier. -Assume that there is no other use for the capacity now being used to produce the component and the total fixed manufacturing overhead of the company would be unaffected by this decision.If Rodgers Company purchases the components rather than making them internally,what would be the impact on the company's annual net operating income?

Iwasaki Inc.is considering whether to continue to make a component or to buy it from an outside supplier.The company uses 13,000 of the components each year.The unit product cost of the component according to the company's cost accounting system is given as follows: Assume that direct labor is a variable cost.Of the fixed manufacturing overhead,30% is avoidable if the component were bought from the outside supplier.In addition,making the component uses 1 minute on the machine that is the company's current constraint.If the component were bought,this machine time would be freed up for use on another product that requires 2 minutes on this machine and that has a contribution margin of $5.20 per unit. When deciding whether to make or buy the component,what cost of making the component should be compared to the price of buying the component?

Freestone Company is considering renting Machine Y to replace Machine X.It is expected that Y will waste less direct materials than does X.If Y is rented,X will be sold on the open market.For this decision,which of the following factors is (are)relevant? I.Cost of direct materials used II.Resale value of Machine X

The Kelsh Company has two divisions--North and South.The divisions have the following revenues and expenses: Management at Kelsh is pondering the elimination of North Division.If North Division were eliminated,its traceable fixed expenses could be avoided.The total common corporate expenses would be unaffected.Given these data,the elimination of North Division would result in an overall company net operating income of:

Ellis Television makes and sells portable televisions.Each television regularly sells for $210.The following cost data per television is based on a full capacity of 10,000 televisions produced each period. A special order has been received by Ellis for a sale of 2,000 televisions to an overseas customer.The only selling costs that would be incurred on this order would be $6 per television for shipping.Ellis is now selling 6,000 televisions through regular channels each period.What should be the minimum selling price per television in negotiating a price for this special order?

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

Meacham Company has traditionally made a subcomponent of its major product. Annual production of 20,000 subcomponents results in the following costs: Meacham has received an offer from an outside supplier who is willing to provide 20,000 units of this subcomponent each year at a price of $28 per subcomponent. Meacham knows that the facilities now being used to make the subcomponent would be rented to another company for $75,000 per year if the subcomponent were purchased from the outside supplier. Otherwise, the fixed overhead would be unaffected. -If Meacham decides to purchase the subcomponent from the outside supplier,how much higher or lower will net operating income be than if Meacham continued to make the subcomponent?

A study has been conducted to determine if Product A should be dropped.Sales of the product total $200,000 per year;variable expenses total $140,000 per year.Fixed expenses charged to the product total $90,000 per year.The company estimates that $40,000 of these fixed expenses will continue even if the product is dropped.These data indicate that if Product A is dropped,the company's overall net operating income would:

Zurasky Corporation is considering two alternatives: A and B. Costs associated with the alternatives are listed below: -What is the differential cost of Alternative B over Alternative A,including all of the relevant costs?

Pappan 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.

Mckerchie Inc. manufactures industrial components. One of its products, which is used in the construction of industrial air conditioners, is known as G62. Data concerning this product are given below: The above per unit data are based on annual production of 9,000 units of the component. Direct labor can be considered to be a variable cost. -The company has received a special,one-time-only order for 300 units of component G62.There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order.Assuming that Mckerchie has excess capacity and can fill the order without cutting back on the production of any product,what is the minimum price per unit on the special order below which the company should not go?