Exam 11: Differential Analysis: The Key to Decision Making

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. -Which product makes the LEAST profitable use of the milling machines?

Austin Wool Products purchases raw wool and processes it into yarn. The spindles of yarn can then be sold directly to stores or they can be used by Austin Wool Products to make afghans. Each afghan requires one spindle of yarn. Current cost and revenue data for the spindles of yarn and for the afghans are as follows: Each month 4,000 spindles of yarn are produced that can either be sold outright or processed into afghans. -If Austin chooses to produce 4,000 afghans each month,the change in the monthly net operating income as compared to selling 4,000 spindles of yarn is:

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.However,assume that Mckerchie has no excess capacity and this special order would require 50 minutes of the constraining resource,which could be used instead to produce products with a total contribution margin of $6,900.What is the minimum price per unit on the special order below which the company should not go?

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 net total dollar advantage (disadvantage)of purchasing the part rather than making it?

The Varone Company makes a single product called a Hom. The company has the capacity to produce 40,000 Homs per year. Per unit costs to produce and sell one Hom at that activity level are: The regular selling price for one Hom is $60. A special order has been received at Varone from the Fairview Company to purchase 8,000 Homs next year at 15% off the regular selling price. If this special order were accepted, the variable selling expense would be reduced by 25%. However, Varone would have to purchase a specialized machine to engrave the Fairview name on each Hom in the special order. This machine would cost $12,000 and it would have no use after the special order was filled. The total fixed costs, both manufacturing and selling, are constant within the relevant range of 30,000 to 40,000 Homs per year. Assume direct labor is a variable cost. -If Varone can expect to sell 32,000 Homs next year through regular channels,at what special order price from Fairview should Varone be economically indifferent between either accepting or not accepting this special order?

The constraint at Vrana Inc.is an expensive milling machine.The three products listed below use this constrained resource. Required: a.Rank the products in order of their current profitability from the most profitable to the least profitable.In other words,rank the products in the order in which they should be emphasized.Show your work! b.Assume that sufficient constraint time is available 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?

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. -If management decides to buy part O13 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?

Vertical integration is the involvement by a company in more than one of the steps from securing basic raw materials to the production and distribution of a finished product.

When there is a production constraint,a company should emphasize the products with:

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 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?

Cung Inc.has some material that originally cost $68,400.The material has a scrap value of $30,100 as is,but if reworked at a cost of $1,400,it could be sold for $30,800.What would be the incremental effect on the company's overall profit of reworking and selling the material rather than selling it as is as scrap?

Power Systems Inc.manufactures jet engines for the United States armed forces on a cost-plus basis.The production cost of a particular jet engine is shown below: If production of this engine was discontinued,the production capacity would be idle,and the supervisor would be laid off.The depreciation referred to above is for special equipment that would have no resale value and that does not wear out through use.When asked to bid on the next contract for this engine,the minimum unit price that Power Systems should bid is:

Sunk costs are considered to be avoidable costs.

Mr.Earl Pearl,accountant for Margie Knall Co. ,Inc. ,has prepared the following product-line income data: The following additional information is available: * The factory rent of $1,500 assigned to Product C is avoidable if the product were dropped. * The company's total depreciation would not be affected by dropping C. * Eliminating Product C will reduce the monthly utility bill from $1,500 to $800. * All supervisors' salaries are avoidable. * If Product C is discontinued,the maintenance department will be able to reduce monthly expenses from $3,000 to $2,000. * Elimination of Product C will make it possible to cut two persons from the administrative staff;their combined salaries total $3,000. Required: Prepare an analysis showing whether Product C should be eliminated.

The Varone Company makes a single product called a Hom. The company has the capacity to produce 40,000 Homs per year. Per unit costs to produce and sell one Hom at that activity level are: The regular selling price for one Hom is $60. A special order has been received at Varone from the Fairview Company to purchase 8,000 Homs next year at 15% off the regular selling price. If this special order were accepted, the variable selling expense would be reduced by 25%. However, Varone would have to purchase a specialized machine to engrave the Fairview name on each Hom in the special order. This machine would cost $12,000 and it would have no use after the special order was filled. The total fixed costs, both manufacturing and selling, are constant within the relevant range of 30,000 to 40,000 Homs per year. Assume direct labor is a variable cost. -If Varone has an opportunity to sell 37,960 Homs next year through regular channels and the special order is accepted for 15% off the regular selling price,the effect on net operating income next year due to accepting this order would be a:

Part N29 is used by Farman Corporation to make one of its products.A total of 11,000 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 the part and sell it to the company for $21.20 each.If this offer is accepted,the supervisor's salary and all of the variable costs,including the 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,the space used to make part N29 could be used to make more of one of the company's other products,generating an additional segment margin of $29,000 per year for that product.What would be the impact on the company's overall net operating income of buying part N29 from the outside supplier?

Harris Corp.manufactures three products from a common input in a joint processing operation.Joint processing costs up to the split-off point total $200,000 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: The "Further Processing Costs" consist of variable and avoidable fixed costs. Required: Which product or products should be sold at the split-off point,and which product or products should be processed further? Show computations.

Spurrier Corporation produces two intermediate products,A and B,from a common input.Intermediate product A can be further processed into end product X.Intermediate product B can be further processed into end product Y.The common input is purchased in batches that cost $50 each and the cost of processing a batch to produce intermediate products A and B is $15.Intermediate product A can be sold as is for $28 or processed further for $18 to make end product X that is sold for $43.Intermediate product B can be sold as is for $31 or processed further for $24 to make end product Y that is sold for $68. Required: a.Assuming that no other costs are involved in processing potatoes or in selling products,how much money does the company make from processing one batch of the common input into the end products X and Y? Show your work! b.Should each of the intermediate products,A and B,be sold as is or processed further into an end product? Explain.

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 ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $41.60 per unit.By how much would this special order increase (decrease)the company's net operating income for the month?

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 the intermediate product beet juice into refined sugar rather than selling it as is?