Exam 11: Differential Analysis: The Key to Decision Making

Zollars Cane Products,Inc. ,processes sugar cane in batches.The company buys a batch of sugar cane from farmers for $70 which is then crushed in the company's plant at a cost of $19.Two intermediate products,cane fiber and cane juice,emerge from the crushing process.The cane fiber can be sold as is for $21 or processed further for $13 to make the end product industrial fiber that is sold for $42.The cane juice can be sold as is for $44 or processed further for $26 to make the end product molasses that is sold for $88.How much profit (loss)does the company make by processing one batch of sugar cane into the end products industrial fiber and molasses?

A sunk cost is a cost that has already been incurred and that cannot be avoided regardless of what action is chosen.

Two alternatives, code-named X and Y, are under consideration at Afalava Corporation. Costs associated with the alternatives are listed below. -Are the materials costs and processing costs relevant in the choice between alternatives X and Y? (Ignore the equipment rental and occupancy costs in this question. )

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 LEAST profitable use of the grinding machines?

Peluso Company,a manufacturer of snowmobiles,is operating at 70% of plant capacity.Peluso's plant manager is considering making the headlights now being purchased from an outside supplier for $11 each.The Peluso plant has idle equipment that could be used to manufacture the headlights.The design engineer estimates that each headlight requires $4 of direct materials,$3 of direct labor,and $6.00 of manufacturing overhead.Forty percent of the manufacturing overhead is a fixed cost that would be unaffected by this decision.A decision by Peluso Company to manufacture the headlights should result in a net gain (loss)for each headlight of:

An automated turning machine is the current constraint at Naik Corporation.Three products use this 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.

Kramer Company makes 4,000 units per year of a part called an axial tap for use in one of its products.Data concerning the unit production costs of the axial tap follow: An outside supplier has offered to sell Kramer Company all of the axial taps it requires.If Kramer Company decided to discontinue making the axial taps,40% of the above fixed manufacturing overhead costs could be avoided.Assume that direct labor is a variable cost. Required: a.Assume Kramer Company has no alternative use for the facilities presently devoted to production of the axial taps.If the outside supplier offers to sell the axial taps for $65 each,should Kramer Company accept the offer? Fully support your answer with appropriate calculations. b.Assume that Kramer Company could use the facilities presently devoted to production of the axial taps to expand production of another product that would yield an additional contribution margin of $80,000 annually.What is the maximum price Kramer Company should be willing to pay the outside supplier for axial taps?

The constraint at Mcglathery 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 the constrained resource?

The Hayes Company manufactures and sells several products,one of which is called a slip differential.The company normally sells 30,000 units of the slip differential each month.At this activity level,unit costs are: An outside supplier has offered to produce the slip differentials for the Hayes Company,and to ship them directly to the Hayes Company's customers.This arrangement would permit the Hayes Company to reduce its variable selling expenses by one third (due to elimination of freight costs).The facilities now being used to produce the slip differentials would be idle and fixed manufacturing overhead would continue at 60 percent of its present level.The total fixed selling expenses of the company would be unaffected by this decision. Required: What is the maximum acceptable price quotation for the slip differentials from the outside supplier?

Managers should not authorize working overtime at a work station that contains a bottleneck.

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. -A decision by Cosmo Inc.to close the Town Store would result in a monthly increase (decrease)in Cosmo's operating income of:

Foulds Company makes 10,000 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 $42.30 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 $39,000 per year. If the part were purchased from the outside supplier,all of the direct labor cost of the part would be avoided.However,$6.40 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 $47.90 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 10,000 units required each year?

Part E43 is used in one of Ran Corporation's products.The company's Accounting Department reports the following costs of producing the 12,000 units of the part that are needed every year. An outside supplier has offered to make the part and sell it to the company for $14.70 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.If the outside supplier's offer were accepted,only $5,000 of these allocated general overhead costs would be avoided. Required: a.Prepare a report that shows the effect on the company's total net operating income of buying part E43 from the supplier rather than continuing to make it inside the company. b.Which alternative should the company choose?

Consider the following production and cost data for two products,X and Y: The company has 15,000 machine hours 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 cost of a resource that has no alternative use in a make or buy decision problem has an opportunity cost of zero.

Joint costs are not relevant to the decision to sell a product at the split-off point or to process the product further.

Avoidable costs are also called relevant costs.

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. -Which of the intermediate products should be processed further?

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 the intermediate product cane juice into molasses rather than selling it as is?

Masse Corporation uses part G18 in one of its products.The company's Accounting Department reports the following costs of producing the 16,000 units of the part that are needed every year. An outside supplier has offered to make the part and sell it to the company for $28.00 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 $22,000 of these allocated general overhead costs would be avoided.In addition,the space used to produce part G18 could be used to make more of one of the company's other products,generating an additional segment margin of $22,000 per year for that product. Required: a.Prepare a report that shows the effect on the company's total net operating income of buying part G18 from the supplier rather than continuing to make it inside the company. b.Which alternative should the company choose?