Exam 9: Differential Analysis: the Key to Decision Making

The split-off point in a process that produces joint products is the point in the manufacturing process at which the joint products are sent to separate customers.

Part A42 is used by Elgin Corporation to make one of its products. A total of 16,000 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 $30.40 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 A42 could be used to make more of one of the company's other products, generating an additional segment margin of $23,000 per year for that product. What would be the impact on the company's overall net operating income of buying part A42 from the outside supplier?

The Flint Fan Corporation is considering the addition of a new model fan, the F-27, to its current products. The expected cost and revenue data for the F-27 fan are as follows: If the F-27 is added as a new product, it is expected that the contribution margin of other products will drop by $7,000 per year. -At what selling price would the new product be just breaking even?

Hermenegildo Corporation is presently making part P42 that is used in one of its products. A total of 10,000 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 $23.90 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 $4,000 of these allocated general overhead costs would be avoided. -In addition to the facts given above, assume that the space used to produce part P42 could 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 P42 from the outside supplier and using the freed space to make more of the other product?

Bowen Corporation produces products P, Q, and R from a joint production process. Each product may be sold at the split-off point or processed further. Joint production costs of $80,000 per year are allocated to the products based on the relative number of units produced. Data for Bowen's operations for last year follow: Required: Which products should be processed beyond the split-off point?