Exam 9: Differential Analysis: the Key to Decision Making

Fixed costs may or may not be sunk costs.

The Talbot Corporation makes wheels that it uses in the production of bicycles. Talbot's costs to produce 100,000 wheels annually are: An outside supplier has offered to sell Talbot similar wheels for $1.25 per wheel. If the wheels are purchased from the outside supplier, $15,000 of annual fixed overhead could be avoided and the facilities now being used could be rented to another company for $45,000 per year. Direct labor is a variable cost. -At what purchase price for the wheels would Talbot be indifferent between making or buying the wheels?

Narciso Corporation is preparing a bid for a special order that would require 880 liters of material R19S. The company already has 280 liters of this raw material in stock that originally cost $6.10 per liter. Material R19S 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 $5.45 per liter. New stocks of the material can be readily purchased for $6.20 per liter. What is the relevant cost of the 880 liters of the raw material when deciding how much to bid on the special order?

Joint products are products that are sold to customers as a set or as part of a group of products.

Hal currently works as the fry guy at Burger Haven but is thinking of quitting his job to attend college full time next semester. Which of the following would be considered an opportunity cost of attending college?

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 ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $76.40 per unit. By how much would this special order increase (decrease) the company's net operating income for the month?

Opportunity costs are not usually recorded in the accounts of a business.

Lindon Company uses 5,000 units of Part X each year as a component in the assembly of one of its products. The company is presently producing Part X internally at a total cost of $80,000 as follows: An outside supplier has offered to provide Part X at a price of $13 per unit. If Lindon Company stops producing the part internally, one-third of the fixed manufacturing overhead would be eliminated. Required: Prepare an analysis showing the annual advantage or disadvantage of accepting the outside supplier's offer.

Tish Corporation produces a part used in the manufacture of one of its products. The unit product cost is $26, computed as follows: An outside supplier has offered to provide the annual requirement of 5,000 of the parts for only $21 each. The company estimates that 75% of the fixed manufacturing overhead cost above could be eliminated 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 from the outside supplier would be:

When a multi-product factory operates at full capacity, decisions must be made about which products to emphasize. In making such decisions, products should be ranked based on:

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 LEAST profitable use of the grinding machines?

Nesmith Corporation is considering two alternatives: A and B. Costs associated with the alternatives are listed below: -Are the materials costs and processing costs relevant in the choice between alternatives A and B? (Ignore the equipment rental and occupancy costs in this question.)

The management of Kabanuck Corporation is considering dropping product V41B. 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 $184,000 of the fixed manufacturing expenses and $200,000 of the fixed selling and administrative expenses are avoidable if product V41B is discontinued. -What would be the effect on the company's overall net operating income if product V41B were dropped?

Two alternatives, code-named X and Y, are under consideration at Brahler Corporation. Costs associated with the alternatives are listed below. -What is the differential cost of Alternative Y over Alternative X, including all of the relevant costs?

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. -If P is processed further and then sold, rather than being sold at the split-off point, the change in monthly net operating income would be a:

Mitchener Corp. manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $300,000 per year. The company allocates these costs to the joint products on the basis of their total sales value at the split-off point. Each product may be sold at the split-off point or processed further. The additional processing costs and sales value after further processing for each product (on an annual basis) are: Required: Which product or products should be sold at the split-off point, and which product or products should be processed further? Show computations.

Two products, LB and NH, emerge from a joint process. Product LB has been allocated $30,800 of the total joint costs of $44,000. A total of 2,000 units of product LB are produced from the joint process. Product LB can be sold at the split-off point for $13 per unit, or it can be processed further for an additional total cost of $14,000 and then sold for $15 per unit. If product LB is processed further and sold, what would be the effect on the overall profit of the company compared with sale in its unprocessed form directly after the split-off point?

Fahringer 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.

Zuppa Corporation currently maintains its own printing department. The annual costs of running this department are as follows: Somatic Copy Service has offered to provide Zuppa with all of its printing needs at a total annual cost of $68,000. If Zuppa went with this offer, they would close down their printing department. Except for 30% of the fixed costs, all of the annual printing department costs above can be avoided if it was closed down. Based on this information, would Zuppa be better off to keep its printing department or to shut it down and take Somatic's offer and by how much?

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 6,000 haks this month and thus some regular sales would have to be given up. If this offer is accepted by Molis, the company's operating income for the month will: