Exam 9: Differential Analysis: the Key to Decision Making

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. -According to the company's accounting system, what is the net operating income earned by product V41B? Include all costs in this calculation-whether relevant or not.

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. -The sunk cost in this situation is:

Ramon Corporation makes 18,000 units of part E44 each year. This part is used in one of the company's products. 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 and sell the part to the company for $23.30 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 $5,000 of these allocated general overhead costs would be avoided. In addition, the space used to produce part E44 would be used to make more of one of the company's other products, generating an additional segment margin of $21,000 per year for that product. What would be the impact on the company's overall net operating income of buying part E44 from the outside supplier?

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. -Which product makes the LEAST profitable use of the milling machines?

Crooks Corporation processes sugar beets in batches that it purchases from farmers for $57 a batch. A batch of sugar beets costs $12 to crush in the company's plant. Two intermediate products, beet fiber and beet juice, emerge from the crushing process. The beet fiber can be sold as is for $28 or processed further for $17 to make the end product industrial fiber that is sold for $67. The beet juice can be sold as is for $39 or processed further for $24 to make the end product refined sugar that is sold for $54. Which of the intermediate products should be processed further?

Duarte Corporation processes sugar beets that it purchases from farmers. Sugar beets are processed in batches. A batch of sugar beets costs $31 to buy from farmers and $15 to crush in the company's plant. Two intermediate products, beet fiber and beet juice, emerge from the crushing process. The beet fiber can be sold as is for $27 or processed further for $14 to make the end product industrial fiber that is sold for $44. The beet juice can be sold as is for $32 or processed further for $29 to make the end product refined sugar that is sold for $50. -How much more profit (loss) does the company make by processing one batch of sugar beets into the end products industrial fiber and refined sugar?

Depreciation expense on existing factory equipment is usually irrelevant in a decision of whether to accept or reject a special offer for a company's product.

Future costs that do not differ between the alternatives in a decision are avoidable costs.

Nicklin Corporation is considering two alternatives that are code-named M and N. Costs associated with the alternatives 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?

Duarte Corporation processes sugar beets that it purchases from farmers. Sugar beets are processed in batches. A batch of sugar beets costs $31 to buy from farmers and $15 to crush in the company's plant. Two intermediate products, beet fiber and beet juice, emerge from the crushing process. The beet fiber can be sold as is for $27 or processed further for $14 to make the end product industrial fiber that is sold for $44. The beet juice can be sold as is for $32 or processed further for $29 to make the end product refined sugar that is sold for $50. -Which of the intermediate products should be processed further?

Teich Inc. is considering whether to continue to make a component or to buy it from an outside supplier. The company uses 15,000 of the components each year. The unit product cost of the component according to the company's absorption cost accounting system is given as follows: Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 10% is avoidable if the component were bought from the outside supplier; the remainder is not avoidable. In addition, making the component uses 3 minutes on the machine that is the company's current constraint. If the component were bought, time would be freed up for use on another product that requires 6 minutes on this machine and that has a contribution margin of $8.10 per unit. When deciding whether to make or buy the component, what cost of making the component should be compared to the price of buying the component?

The book value of old equipment is a relevant cost in a decision to replace that equipment. (Ignore taxes.)

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. -Which product makes the MOST profitable use of the milling machines?

Vanikord Corporation currently has two divisions which had the following operating results for last year: Because the Rubber Division sustained a loss, the president of Vanikoro is considering the elimination of this division. All of the division's traceable fixed costs could be avoided if the division was dropped. None of the allocated common corporate fixed costs could be avoided. If the Rubber Division was dropped at the beginning of last year, how much higher or lower would Vanikoro's total net operating income have been for the year?

Part O43 is used in one of Scheetz Corporation's products. The company's Accounting Department reports the following costs of producing the 6,000 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 $26.40 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 $1,000 of these allocated general overhead costs would be avoided. Required: a. Prepare a report that shows the effect on the company's total net operating income of buying part O43 from the supplier rather than continuing to make it inside the company. b. Which alternative should the company choose?

Costabile Corporation is considering dropping product G41O. 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 $46,000 of the fixed selling and administrative expenses are avoidable if product G41O is discontinued. Required: a. According to the company's accounting system, what is the net operating income earned by product G41O? Show your work! b. What would be the effect on the company's overall net operating income of dropping product G41O? Should the product be dropped? Show your work!

When a company has a production constraint, total contribution margin will be maximized by emphasizing the products with the lowest contribution margin per unit of the constrained resource.

Yukon Perfume Corporation manufactures three distinct perfumes (I, II, and III) from a single joint process. The three perfumes can be sold to discount stores in the form they are in at the split-off point. However, if the perfumes are further processed, they can be sold to specialty stores. Costs related to each batch of perfume separation is as follows: For which product(s) above would it be more profitable for Yukon to sell after further processing rather than at the split-off point?

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. -How many minutes of grinding machine time would be required to satisfy demand for all four products?

In a make-or-buy decision, relevant costs include: