Exam 11: Differential Analysis: The Key to Decision Making

Payne Company makes two products, M and N, in a joint process. At the split-off point, 40,000 units of M and 50,000 units of N are available each month. Monthly joint production costs are $270,000. Product M can be sold at the split-off point for $4.20 per unit. Product N can either be sold at the split-off point for $3.20 per unit or it can be processed further and sold for $6.30 per unit. If N is processed further, additional processing costs of $2.50 per unit will be incurred. -If N is processed further and then sold,rather than being sold at the split-off point,the change in monthly operating income would be a:

Glunn Company makes three products in a single facility.These products have the following unit product costs: Additional data concerning these products are listed below. The mixing machines are potentially the constraint in the production facility.A total of 24,200 minutes are available per month on these machines. Direct labor is a variable cost in this company. Required: a.How many minutes of mixing machine time would be required to satisfy demand for all three products? b.How much of each product should be produced to maximize net operating income? (Round off to the nearest whole unit. ) c.Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity? (Round off to the nearest whole cent. )

The management of Freshwater Corporation is considering dropping product C11B. 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 $211,000 of the fixed manufacturing expenses and $122,000 of the fixed selling and administrative expenses are avoidable if product C11B is discontinued. -According to the company's accounting system,what is the net operating income earned by product C11B?

The Tingey Company has 500 obsolete microcomputers that are carried in inventory at a total cost of $720,000. If these microcomputers are upgraded at a total cost of $100,000, they can be sold for a total of $160,000. As an alternative, the microcomputers can be sold in their present condition for $50,000. -The sunk cost in this situation is:

The Tingey Company has 500 obsolete microcomputers that are carried in inventory at a total cost of $720,000. If these microcomputers are upgraded at a total cost of $100,000, they can be sold for a total of $160,000. As an alternative, the microcomputers can be sold in their present condition for $50,000. -Suppose the selling price of the upgraded computers has not been set.At what selling price per unit would the company be as well off upgrading the computers as if it just sold the computers in their present condition?

Which of the following are valid reasons for eliminating a product line? I.The product line's contribution margin is negative. II.The product line's traceable fixed costs plus its allocated common corporate costs are less than its contribution margin.

Redner,Inc.produces three products.Data concerning the selling prices and unit costs of the three products appear below: Fixed costs are applied to the products on the basis of direct labor hours. Demand for the three products exceeds the company's productive capacity.The grinding machine is the constraint,with only 2,400 minutes of grinding machine time available this week. Required: a.Given the grinding machine constraint,which product should be emphasized? Support your answer with appropriate calculations. b.Assuming that there is still unfilled demand for the product that the company should emphasize in part (a)above,up to how much should the company be willing to pay for an additional hour of grinding machine time?

Condensed monthly operating income data for Cosmo Inc. for November is presented below. Additional information regarding Cosmo's operations follows the statement. Three-quarters of each store's traceable fixed expenses are avoidable if the store were to be closed. Cosmo allocates common fixed expenses to each store on the basis of sales dollars. Management estimates that closing the Town Store would result in a ten percent decrease in Mall Store sales, while closing the Mall Store would not affect Town Store sales. The operating results for November are representative of all months. -Cosmo is considering a promotional campaign at the Town Store that would not affect the Mall Store.Increasing annual promotional expenses at the Town Store by $60,000 in order to increase Town Store sales by ten percent would result in a monthly increase (decrease)in Cosmo's operating income of:

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 net monetary advantage (disadvantage)of processing Product X beyond the split-off point?

Ethridge Corporation is presently making part H25 that is used in one of its products.A total of 9,000 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 $15.40 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 H25 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?

Part I51 is used in one of Pries Corporation's products.The company makes 18,000 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 $15.80 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 $26,000 of these allocated general overhead costs would be avoided. If management decides to buy part I51 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?

Holvey Company makes three products in a single facility.Data concerning these products follow: The mixing machines are potentially the constraint in the production facility.A total of 6,300 minutes are available per month on these machines.Direct labor is a variable cost in this company. Required: a.How many minutes of mixing machine time would be required to satisfy demand for all three products? b.How much of each product should be produced to maximize net operating income? (Round off to the nearest whole unit. ) c.Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity? (Round off to the nearest whole cent. )

Fixed costs are irrelevant in a decision.

Nowlan Co.manufactures and sells trophies for winners of athletic and other events.Its manufacturing plant has the capacity to produce 11,000 trophies each month;current monthly production is 8,800 trophies.The company normally charges $87 per trophy.Cost data for the current level of production are shown below: The company has just received a special one-time order for 500 trophies at $50 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?

Resendes Refiners, Inc., processes sugar cane that it purchases from farmers. Sugar cane is processed in batches. A batch of sugar cane costs $48 to buy from farmers and $16 to crush in the company's plant. Two intermediate products, cane fiber and cane juice, emerge from the crushing process. The cane fiber can be sold as is for $24 or processed further for $17 to make the end product industrial fiber that is sold for $38. The cane juice can be sold as is for $34 or processed further for $23 to make the end product molasses that is sold for $76. -How much profit (loss)does the company make by processing one batch of sugar cane into the end products industrial fiber and molasses?

The Immanuel Company has just obtained a request for a special order of 6,000 jigs to be shipped at the end of the month at a selling price of $7 each. The company has a production capacity of 90,000 jigs per month with total fixed production costs of $144,000. At present, the company is selling 80,000 jigs per month through regular channels at a selling price of $11 each. For these regular sales, the cost for one jig is: If the special order is accepted, Immanuel will not incur any selling expense; however, it will incur shipping costs of $0.30 per unit. Total fixed production cost would not be affected by this order. -If Immanuel accepts this special order,the change in monthly net operating income will be a:

Joint production costs are relevant costs in decisions about what to do with a product from the split-off point onward in the production process.

Jerston Company has an annual plant capacity of 3,000 units.Data concerning this product are given below: The company has received a special order for 500 units at a selling price of $45 each.Regular sales would not be affected,and sales commissions on the 500 units would be reduced by one-third.This special order would have no impact on total fixed costs. Required: Determine whether the company should accept the special order.Show all computations.

Cress Company makes four products in a single facility. Data concerning these products appear below: The milling machines are potentially the constraint in the production facility. A total of 11,500 minutes are available per month on these machines. -How many minutes of milling machine time would be required to satisfy demand for all four products?

Elhard Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 40,000 units per month is as follows: The normal selling price of the product is $51.10 per unit. An order has been received from an overseas customer for 2,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $0.10 less per unit on this order than on normal sales. Direct labor is a variable cost in this company. -Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 200 units for regular customers.The minimum acceptable price per unit for the special order is closest to: