Exam 11: Differential Analysis: The Key to Decision Making

Generally,a product line should be dropped when the fixed costs that can be avoided by dropping the product line are less than the contribution margin that will be lost.

Holtrop Corporation has received a request for a special order of 9,000 units of product Z74 for $46.50 each.The normal selling price of this product is $51.60 each,but the units would need to be modified slightly for the customer.The normal unit product cost of product Z74 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 Z74 that would increase the variable costs by $6.20 per unit and that would require a one-time investment of $46,000 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!

Sohr Corporation processes sugar beets that it purchases from farmers. Sugar beets are processed in batches. A batch of sugar beets costs $50 to buy from farmers and $15 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 $20 or processed further for $19 to make the end product industrial fiber that is sold for $58. The beet juice can be sold as is for $41 or processed further for $23 to make the end product refined sugar that is sold for $58. -How much profit (loss)does the company make by processing one batch of sugar beets into the end products industrial fiber and refined sugar?

Broze Company makes four products in a single facility. These products have the following unit product costs: Additional data concerning these products are listed below. The grinding machines are potentially the constraint in the production facility. A total of 53,600 minutes are available per month on these machines. Direct labor is a variable cost in this company. -How many minutes of grinding machine time would be required to satisfy demand for all four products?

Meltzer Corporation is presently making part O13 that is used in one of its products. A total of 3,000 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 produce and sell the part to the company for $27.00 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 $3,000 of these allocated general overhead costs would be avoided. -In addition to the facts given above,assume that the space used to produce part O13 could be used to make more of one of the company's other products,generating an additional segment margin of $26,000 per year for that product.What would be the impact on the company's overall net operating income of buying part O13 from the outside supplier and using the freed space to make more of the other product?

An avoidable cost is a cost that can be eliminated (in whole or in part)as a result of choosing one alternative over another.

Ahsan Company makes 60,000 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 $45.70 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 $318,000 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $3.50 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. -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 60,000 units required each year?

Galluzzo Corporation processes sugar beets in batches.A batch of sugar beets costs $51 to buy from farmers and $14 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 $20 or processed further for $18 to make the end product industrial fiber that is sold for $45.The beet juice can be sold as is for $41 or processed further for $21 to make the end product refined sugar that is sold for $62.How much profit (loss)does the company make by processing one batch of sugar beets into the end products industrial fiber and refined sugar?

Rojo Corporation has received a request for a special order of 8,000 units of product W68 for $27.20 each.Product W68's unit product cost is $18.50,determined 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 modifications made to product W68 that would increase the variable costs by $7.90 per unit and that would require an investment of $31,000 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:

Knaack Corporation is presently making part R20 that is used in one of its products. A total of 18,000 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 produce and sell the part to the company for $27.70 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, none of which would be avoided if the part were purchased instead of produced internally. -In addition to the facts given above,assume that the space used to produce part R20 could be used to make more of one of the company's other products,generating an additional segment margin of $27,000 per year for that product.What would be the impact on the company's overall net operating income of buying part R20 from the outside supplier and using the freed space to make more of the other product?

Product R19N has been considered a drag on profits at Buzzeo 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 $49,000 of the fixed manufacturing expenses and $30,000 of the fixed selling and administrative expenses are avoidable if product R19N is discontinued.What would be the effect on the company's overall net operating income if product R19N were dropped?

The opportunity cost of making a component part in a factory with no excess capacity is the:

Jumonville 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 70,000 units per month is as follows: The normal selling price of the product is $56.70 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 $0.70 less per unit on this order than on normal sales. Direct labor is a variable cost in this company. Required: a.Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $51.20 per unit.By how much would this special order increase (decrease)the company's net operating income for the month? b.Suppose the company is already operating at capacity when the special order is received from the overseas customer.What would be the opportunity cost of each unit delivered to the overseas customer? c.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 700 units for regular customers.What would be the minimum acceptable price per unit for the special order?

Stampka 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 4,200 units of component JJF.Each unit of JJF requires 6 units of material O38 and 9 units of material P56.Data concerning these two materials follow: Material O38 is in use in many of the company's products and is routinely replenished.Material P56 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 JJF?

Janus Corporation has in stock 43,700 kilograms of material L that it bought five years ago for $6.10 per kilogram.This raw material was purchased to use in a product line that has been discontinued.Material L can be sold as is for scrap for $3.23 per kilogram.An alternative would be to use material L in one of the company's current products,E99D,which currently requires 2 kilograms of a raw material that is available for $9.45 per kilogram.Material L can be modified at a cost of $0.62 per kilogram so that it can be used as a substitute for this material in the production of product E99D.However,after modification,3 kilograms of material L is required for every unit of product E99D that is produced.Janus Corporation has now received a request from a company that could use material L in its production process.Assuming that Janus Corporation could use all of its stock of material L to make product E99D or the company could sell all of its stock of the material at the current scrap price of $3.23 per kilogram,what is the minimum acceptable selling price of material L to the company that could use material L in its own production process?

Wright Company produces products I,J,and K from a single raw material input.Budgeted data for the next month follows: If the cost of the raw material input is $78,000,which of the products should be processed beyond the split-off point?

When a company has a production constraint,the product with the highest contribution margin per unit of the constrained resource should be given highest priority.

Broze Company makes four products in a single facility. These products have the following unit product costs: Additional data concerning these products are listed below. The grinding machines are potentially the constraint in the production facility. A total of 53,600 minutes are available per month on these machines. Direct labor is a variable cost in this company. -Which product makes the MOST profitable use of the grinding machines?

Zurasky Corporation is considering two alternatives: A and B. Costs associated with the alternatives are listed below: -Are the materials costs and processing costs relevant in the choice between alternatives A and B? (Ignore the equipment rental and occupancy costs in this question. )

The Western Company is considering the addition of a new product to its current product lines. The expected cost and revenue data for the new product are as follows: If the new product is added to the existing product line, then sales of existing products will decline. As a consequence, the contribution margin of the other existing product lines is expected to drop $78,000 per year. -What is the lowest selling price per unit among those listed below that could be charged for the new product and still make it economically desirable to add the new product?