Exam 9: Differential Analysis: the Key to Decision Making

Wehn Refiners, Inc., processes sugar cane that it purchases from farmers. Sugar cane is processed in batches. A batch of sugar cane costs $40 to buy from farmers and $13 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 $28 or processed further for $18 to make the end product industrial fiber that is sold for $37. The cane juice can be sold as is for $31 or processed further for $25 to make the end product molasses that is sold for $66. -How much more profit (loss) does the company make by processing one batch of sugar cane into the end products industrial fiber and molasses?

Palinkas Cane Products, Inc., processes sugar cane in batches. The company buys a batch of sugar cane from farmers for $80 which is then crushed in the company's plant at a cost of $11. Two intermediate products, cane fiber and cane juice, emerge from the crushing process. The cane fiber can be sold as is for $22 or processed further for $10 to make the end product industrial fiber that is sold for $30. The cane juice can be sold as is for $41 or processed further for $27 to make the end product molasses that is sold for $101. How much more profit (loss) does the company make by processing one batch of sugar cane into the end products industrial fiber and molasses?

Joint costs are relevant in the decision to sell a product at the split-off point or to process the product further.

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. -If the F-27 product is added next year, the change in operating income should be:

In a sell or process further decision, which of the following costs is relevant? I. A variable production cost incurred after split-off. II) A fixed production cost incurred prior to split-off.

Kerbow Corporation uses part B76 in one of its 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 $27.40 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 $6,000 of these allocated general overhead costs would be avoided. In addition, the space used to produce part B76 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. Required: a. Prepare a report that shows the effect on the company's total net operating income of buying part B76 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, L and C: The company can only perform 65,000 machine set-ups each period due to limited skilled labor and there is unlimited demand for each product. What is the largest possible total contribution margin that can be realized each period?

Tillison Corporation makes three products that use the current constraint which is a particular type of machine. Data concerning those products appear below: -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 Madison Corporation produces three products with the following costs and selling prices: -If Madison has a limit of 10,000 direct labor hours but no limit on machine hours, then the ranking of the products from the most profitable to the least profitable use of the constrained resource is:

Bailey Corporation manufactures and sells a number of products, including Product G. Results for last year for the manufacture and sale of Product G are as follows: Bailey is trying to decide whether or not to discontinue the manufacture and sale of Product G. All expenses other than fixed manufacturing overhead are avoidable if the product is dropped. None of the fixed manufacturing overhead is avoidable. -Assume that dropping Product G would result in a $40,000 increase in the contribution margin of other product lines. If Bailey chooses to drop Product G, then the change in net operating income next year due to this action will be a:

Nesmith Corporation is considering two alternatives: A and B. Costs associated with the alternatives are listed below: -What is the differential cost of Alternative B over Alternative A, including all of the relevant costs?

Moyer 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 2,300 units of component TIB. Each unit of TIB requires 9 units of material F58 and 7 units of material D66. Data concerning these two materials follow: Material F58 is in use in many of the company's products and is routinely replenished. Material D66 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 TIB?

Iaci Company makes two products from a common input. Joint processing costs up to the split-off point total $42,000 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?

Paulsen Corporation makes two products, W and P, in a joint process. At the split-off point, 50,000 units of W and 60,000 units of P are available each month. Monthly joint production costs are $290,000. Product W can be sold at the split-off point for $5.60 per unit. Product P either can be sold at the split-off point for $4.75 per unit or it can be further processed and sold for $7.20 per unit. If P is processed further, additional processing costs of $3.10 per unit will be incurred. -What would the selling price per unit of Product P need to be after processing in order for Paulsen Corporation to be economically indifferent between selling P at the split-off point or processing P further?

The constraint at Bonavita Corporation is time on a particular machine. The company makes three products that use this 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.

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. -According to the company's accounting system, what is the net operating income earned by product I11S? Include all costs in this calculation-whether relevant or not.

Cybil Baunt just inherited a 1958 Chevy Impala from her late Aunt Joop. Aunt Joop purchased the car 40 years ago for $6,000. Cybil is either going to sell the car for $8,000 or have it restored and sell it for $22,000. The restoration will cost $6,000. Cybil would be better off by:

TDockwiller Inc. manufactures industrial components. One of its products, which is used in the construction of industrial air conditioners, is known as D53. Data concerning this product are given below: The above per unit data are based on annual production of 8,000 units of the component. Direct labor is a variable cost -Refer to the original data in the problem. What is the current contribution margin per unit for component D53 based on its selling price of $150 and its annual production of 8,000 units?

Wiacek Corporation has received a request for a special order of 4,000 units of product F65 for $26.60 each. Product F65's unit product cost is $25.80, determined as follows: Direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like modifications made to product F65 that would increase the variable costs by $3.00 per unit and that would require an investment of $23,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order. If the special order is accepted, the company's overall net operating income would increase (decrease) by:

Costs associated with two alternatives, code-named Q and R, being considered by Hunnicutt Corporation 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?