Exam 11: Differential Analysis: The Key to Decision Making

Scherer Corporation is preparing a bid for a special order that would require 720 liters of material U48N.The company already has 560 liters of this raw material in stock that originally cost $6.30 per liter.Material U48N is used in the company's main product and is replenished on a periodic basis.The resale value of the existing stock of the material is $5.80 per liter.New stocks of the material can be readily purchased for $6.65 per liter.What is the relevant cost of the 720 liters of the raw material when deciding how much to bid on the special order?

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. -What is the net advantage or disadvantage to the company from upgrading the computers rather than selling them in their present condition?

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. -What is the highest price that Talboe could pay the outside supplier for each wheel and still be economically indifferent between making or buying the wheels?

Dunford Company produces three products with the following costs and selling prices: -If Dunford has a limit of 20,000 direct labor hours but no limit on units sold or machine hours,then the ranking of the products from the most profitable to the least profitable use of the constrained resource is:

Rothery Co.manufactures and sells medals for winners of athletic and other events.Its manufacturing plant has the capacity to produce 18,000 medals each month;current monthly production is 17,100 medals.The company normally charges $88 per medal.Cost data for the current level of production are shown below: The company has just received a special one-time order for 600 medals at $73 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?

Liffick 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 6,200 units of component VFG.Each unit of VFG requires 8 units of material C79 and 6 units of material X70.Data concerning these two materials follow: Material C79 is in use in many of the company's products and is routinely replenished.Material X70 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 VFG?

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 if the component is purchased from the outside supplier,$35,100 of annual fixed manufacturing overhead would be avoided and the facilities now being used to make the component would be rented to another company for $64,800 per year.If Rodgers chooses to buy the component from the outside supplier under these circumstances,then the impact on annual net operating income due to accepting the offer would be:

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. -At what selling price per unit should Immanuel be indifferent between accepting or rejecting the special offer?

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. -What would be the effect on the company's overall net operating income if product R89H were dropped?

Prevatte Corporation purchases potatoes from farmers.The potatoes are then peeled,producing two intermediate products-peels and depeeled spuds.The peels can then be processed further to make a cocktail of organic nutrients.And the depeeled spuds can be processed further to make frozen french fries.A batch of potatoes costs $45 to buy from farmers and $11 to peel in the company's plant.The peels produced from a batch can be sold as is for animal feed for $27 or processed further for $16 to make the cocktail of nutrients that are sold for $47.The depeeled spuds can be sold as is for $38 or processed further for $27 to make frozen french fries that are sold for $59. 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 potatoes into the cocktail of organic nutrients and frozen french fries? Show your work! b.Should each of the intermediate products,peels and depeeled spuds,be sold as is or processed further into an end product? Explain.

Marcell Corporation is considering two alternatives that are code-named M and N.Costs associated with the alternatives 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?

Pitkin Company produces a part used in the manufacture of one of its products.The unit product cost of the part is $33,computed as follows: An outside supplier has offered to provide the annual requirement of 10,000 of the parts for only $27 each.The company estimates that 30% of the fixed manufacturing overhead costs above will continue if the parts are purchased from the outside supplier.Assume that direct labor is an avoidable cost in this decision.Based on these data,the per unit dollar advantage or disadvantage of purchasing the parts from the outside supplier would be:

Fillip Corporation makes 4,000 units of part U13 each year.This part is used in one of the company's products.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 $21.60 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,the space used to produce part U13 would be used to make more of one of the company's other products,generating an additional segment margin of $13,000 per year for that product. What would be the impact on the company's overall net operating income of buying part U13 from the outside supplier?

Dunford Company produces three products with the following costs and selling prices: -If Dunford has a limit of 30,000 machine hours but no limit on units sold or direct labor hours,then the ranking of the products from the most profitable to the least profitable use of the constrained resource is:

Kempler Corporation processes sugar cane in batches.The company purchases a batch of sugar cane for $34 from farmers and then crushes the cane in the company's plant at the cost of $15.Two intermediate products,cane fiber and cane juice,emerge from the crushing process.The cane fiber can be sold as is for $26 or processed further for $17 to make the end product industrial fiber that is sold for $41.The cane juice can be sold as is for $32 or processed further for $22 to make the end product molasses that is sold for $51.Which of the intermediate products should be processed further?

The management of Rodarmel Corporation is considering dropping product G91Q.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 $57,000 of the fixed manufacturing expenses and $40,000 of the fixed selling and administrative expenses are avoidable if product G91Q is discontinued. Required: a.What is the net operating income earned by product G91Q according to the company's accounting system? Show your work! b.What would be the effect on the company's overall net operating income of dropping product G91Q? Should the product be dropped? Show your work!

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. -If the new product is added next year,the increase in net operating income resulting from this decision would be:

Iaukea Company makes two products from a common input.Joint processing costs up to the split-off point total $49,600 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: Required: a.What is the net monetary advantage (disadvantage)of processing Product X beyond the split-off point? b.What is the net monetary advantage (disadvantage)of processing Product Y beyond the split-off point? c.What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point? d.What is the minimum amount the company should accept for Product Y if it is to be sold at the split-off point?

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. -If management decides to buy part R20 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?

The Cabinet Shoppe is considering the addition of a new line of kitchen cabinets to its current product lines. Expected cost and revenue data for the new cabinets are as follows: If the new cabinets are added, it is expected that the contribution margin of other product lines at the cabinet shop will drop by $20,000 per year. -What is the lowest selling price per unit that could be charged for the new cabinets from the following list and still make it economically desirable to add the new product line?