Exam 9: Differential Analysis: the Key to Decision Making

Tawstir Corporation has 800 obsolete personal computers that are carried in inventory at a total cost of $1,100,000. If these computers are upgraded at a total cost of $40,000, they can be sold for a total of $750,000. As an alternative, the computers can be sold in their present condition for $690,000. -What is the net advantage or disadvantage to the company from upgrading the computers rather than selling them in their present condition?

When a company is involved in only one activity in the entire value chain, it is vertically integrated.

The Molis Corporation has the capacity to produce 15,000 haks each month. Current regular production and sales are 10,000 haks per month at a selling price of $15 each. Based on this level of activity, the following unit costs are incurred: The fixed costs, both manufacturing and administrative, are constant in total within the relevant range of 10,000 to 15,000 haks per month. Direct labor is a variable cost. The Molis Corporation has received a special order from a customer who wants to pay a reduced price of $10 per hak. There would be no selling expense in connection with this special order. And, this order would have no effect on the company's other sales. -Suppose the special order is for 4,000 haks this month. If this offer is accepted by Molis, the company's operating income for the month will:

Hoang Corporation makes three products that use compound W, the current constrained resource. 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.

Bosques Corporation has in stock 35,800 kilograms of material L that it bought five years ago for $5.55 per kilogram. This raw material was purchased to use in a product line that has been discontinued. Material L can be sold as is for scrap for $1.67 per kilogram. An alternative would be to use material L in one of the company's current products, Q08C, which currently requires 2 kilograms of a raw material that is available for $9.15 per kilogram. Material L can be modified at a cost of $0.78 per kilogram so that it can be used as a substitute for this material in the production of product Q08C. However, after modification, 4 kilograms of material L is required for every unit of product Q08C that is produced. Bosques Corporation has now received a request from a company that could use material L in its production process. Assuming that Bosques Corporation could use all of its stock of material L to make product Q08C or the company could sell all of its stock of the material at the current scrap price of $1.67 per kilogram, what is the minimum acceptable selling price of material L to the company that could use material L in its own production process?

Defective units should be detected and scrapped or reworked before the bottleneck operation rather than after it.

Two or more products produced from a common input are called:

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. -Which of the intermediate products should be processed further?

The Madison Corporation produces three products with the following costs and selling prices: -If machine-hours is Madison's production constraint, then the ranking of the products from the most profitable to the least profitable use of the constrained resource is:

Barrus Corporation makes 30,000 motors to be used in the productions of its power lawn mowers. The average cost per motor at this level of activity is as follows: This motor has recently become available from an outside supplier for $25 per motor. If Barrus decides not to make the motors, none of the fixed manufacturing overhead would be avoidable and there would be no other use for the facilities. If Barrus decides to continue making the motor, how much higher or lower will the company's net operating income be than if the motors are purchased from the outside supplier? Assume that direct labor is a variable cost in this company.

Weston Corporation is considering eliminating a department that has a contribution margin of $70,000 and $140,000 in fixed costs. Of the fixed costs, $100,000 cannot be avoided. The effect of eliminating this department on Weston's overall net operating income would be:

Crane Corporation 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 22,600 minutes are available per month on these machines. -How many minutes of milling machine time would be required to satisfy demand for all four products?

The term joint cost is used to describe the costs incurred after the split-off point in a process involving joint products.

Glocker Company makes three products in a single facility. These products have the following unit product costs: Additional data concerning these products are listed below. The mixing machines are potentially the constraint in the production facility. A total of 5,900 minutes are available per month on these machines. Direct labor is a variable cost in this company. Required: a. How many minutes of mixing machine time would be required to satisfy demand for all three products? b. How much of each product should be produced to maximize net operating income? (Round off to the nearest whole unit.) c. Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity? (Round off to the nearest whole cent.)

Brown Corporation makes four products in a single facility. These products have the following unit product costs: Additional data concerning these products are listed below. The grinding machines are potentially the constraint in the production facility. A total of 10,500 minutes are available per month on these machines. Direct labor is a variable cost in this company. -Which product makes the MOST profitable use of the grinding machines?

Opportunity costs are:

The management of Bercegeay Corporation is considering dropping product Y25C. 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 $117,000 of the fixed manufacturing expenses and $78,000 of the fixed selling and administrative expenses are avoidable if product Y25C is discontinued. Required: a. What is the net operating income earned by product Y25C 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 Y25C? Should the product be dropped? Show your work!

Hadley, Inc. makes a line of bathroom accessories. Because of a decline in sales, the company has 10,000 machine hours of idle capacity available each year. This idle capacity could be used by the company to make, rather than buy, one of the components used in its production process. Hadley needs 5,000 units of this component each year. At present, the component is being purchased from an outside supplier at $7.50 per unit. Variable production cost for the component would be $4.10 per unit, and additional supervisory costs would be $18,000 per year. Already existing fixed costs that would be allocated to this part amount to $300,000 per year. -The change in the company's overall annual net operating income that would result from making the component, rather than buying it, would be:

The book value of a machine, as shown on the balance sheet, is not relevant in a decision concerning the replacement of that machine by another machine. (Ignore taxes.)

Claris Corporation (a multi-product company) produces and sells 7,000 units of Product X each year. Each unit of Product X sells for $12 and has a contribution margin of $4. If Product X is discontinued, $19,000 of the $32,000 in fixed costs charged to Product X could be eliminated. If Product X is discontinued, the company's overall operating income would: