Exam 9: Differential Analysis: the Key to Decision Making

Yehle Inc. regularly uses material Y51B and currently has in stock 460 liters of the material for which it paid $2,530 several weeks ago. If this were to be sold as is on the open market as surplus material, it would fetch $4.55 per liter. New stocks of the material can be purchased on the open market for $5.45 per liter, but it must be purchased in lots of 1,000 liters. You have been asked to determine the relevant cost of 720 liters of the material to be used in a job for a customer. The relevant cost of the 720 liters of material Y51B is:

A disadvantage of vertical integration is that by pooling demand for parts from a number of companies, a supplier will face diseconomies of scale that result in lower quality and higher cost than if every company makes its own parts.

Aholt Corporation makes 40,000 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 $46.20 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 $264,000 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $21.90 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. -How much of the unit product cost of $59.90 is relevant in the decision of whether to make or buy the part?

Eley Corporation 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 $86.10 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 $1.20 less per unit on this order than on normal sales. Direct labor is a variable cost in this company. -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. The minimum acceptable price per unit for the special order is closest to:

Falsetta Corporation makes three products that use the current constraint, which is a particular type of machine. Data concerning those products appear below: 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?

The management of Fannin Corporation is considering dropping product H58S. 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 $90,000 of the fixed manufacturing expenses and $42,000 of the fixed selling and administrative expenses are avoidable if product H58S is discontinued. What would be the effect on the company's overall net operating income if product H58S were dropped?

Arenz Corporation processes sugar cane in batches. The company purchases a batch of sugar cane for $53 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 $24 or processed further for $18 to make the end product industrial fiber that is sold for $40. The cane juice can be sold as is for $41 or processed further for $25 to make the end product molasses that is sold for $72. Which of the intermediate products should be processed further?

Bowdish 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 $37 to buy from farmers and $14 to peel in the company's plant. The peels produced from a batch can be sold as is for animal feed for $22 or processed further for $13 to make the cocktail of nutrients that are sold for $40. The depeeled spuds can be sold as is for $37 or processed further for $21 to make frozen french fries that are sold for $53. 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.

The following information relates to next year's projected operating results of the Consumer Division of Xampa Corporation: If the Consumer Division is eliminated, $1,600,000 of the above fixed expenses could be avoided. What will be the effect on Xampa's profit next year if Consumer Division is eliminated?

Albertine Co. manufactures and sells trophies for winners of athletic and other events. Its manufacturing plant has the capacity to produce 16,000 trophies each month; current monthly production is 12,800 trophies. The company normally charges $113 per trophy. Cost data for the current level of production are shown below: The company has just received a special one-time order for 1,200 trophies at $61 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?

Hanson, Inc. makes 1,000 units per year of a part called a prositron for use in one of its products. Data concerning the unit production costs of the prositron follow: An outside supplier has offered to sell Hanson, Inc. all of the prositrons it requires. If Hanson, Inc. decided to discontinue making the prositrons, 10% of the above fixed manufacturing overhead costs could be avoided. Required: a. Assume Hanson, Inc. has no alternative use for the facilities presently devoted to production of the prositrons. If the outside supplier offers to sell the prositrons for $850 each, should Hanson, Inc. accept the offer? Fully support your answer with appropriate calculations. b. Assume that Hanson, Inc. could use the facilities presently devoted to production of the prositrons to expand production of another product that would yield an additional contribution margin of $50,000 annually. What is the maximum price Hanson, Inc. should be willing to pay the outside supplier for prositrons?

Tillison Corporation makes three products that use the current constraint which is a particular type of machine. 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.

Two alternatives, code-named X and Y, are under consideration at Brahler 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.)

The management of Leinberger Corporation is considering dropping product S48J. 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 $28,000 of the fixed manufacturing expenses and $21,000 of the fixed selling and administrative expenses are avoidable if product S48J is discontinued. Required: What would be the effect on the company's overall net operating income if product S48J were dropped? Should the product be dropped? Show your work!

Zemlya Corporation currently records $4,000 of depreciation each year on the computer that it uses for its major data processing needs. The computer currently has one more year of useful life left and it will have a salvage value of zero at the end of that year. Jennifer, one of the accountants at Zemlya, suggested that the computer be sold immediately for $3,000 and that the company hire a data processing firm to handle the corporation's data processing needs. The computer currently requires $25,000 in annual operating costs in addition to the depreciation. The data processing firm would charge $10,000 per year for its services. If Zemlya decides to implement this change, what effect will this have on the corporation's net cash flow for the last year of the computer's useful life?

Dowchow Corporation makes two products from a common input. Joint processing costs up to the split-off point total $38,400 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: -What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point?

Consider the following production and cost data for two products, Q and P: A total of 24,000 machine minutes are 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 most recent monthly income statement for Kennaman Stores is given below: Kennaman is considering closing Store I. If Store I is closed, one-fourth of its traceable fixed expenses would continue unchanged. Also, the closing of Store I would result in a 20% decrease in sales in Store II. Kennaman allocates common fixed expenses on the basis of sales dollars. Required: Compute the overall increase or decrease in Kennaman's net operating income if Store I is closed.

The management of Cackowski Corporation has been concerned for some time with the financial performance of its product I11S 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 $185,000 of the fixed manufacturing expenses and $132,000 of the fixed selling and administrative expenses are avoidable if product I11S is discontinued. -What would be the effect on the company's overall net operating income if product I11S were dropped?

Eliminating nonproductive processing time is particularly important in work stations that do not contain bottlenecks.