Deck 25: Differentialana Ysis Andproduct Pricing

Question 1

Ethics and professional conduct in business
Aaron McKinney is a cost accountant for Majik Systems Inc. Martin Dodd, vice president of marketing, has asked Aaron to meet with representatives of Majik Systems' major competitor to discuss product cost data. Martin indicates that the sharing of these data will enable Majik Systems to determine a fair and equitable price for its products.
Would it be ethical for Aaron to attend the meeting and share the relevant cost data

Answer 1

It is not ethical for Aaron (cost accountant) to attend the meeting and share the relevant cost data. This is due the Federal Law. The Federal Law prevents companies competing in similar markets from sharing cost price information. Hence, he should not share the relevant cost data.

Question 2

Explain the meaning of (a) differential revenue, (b) differential cost, and (c) differential income.

Answer 2

(a) Differential revenue is the amount of increase or decrease in revenue expected from a particular course of action compared with an alternative.
(b) Differential cost is the amount of increase or decrease in cost expected from a particular course of action compared with an alternative.
(c) Differential income is the difference between differential revenue and differential cost.

Question 3

Differential analysis for a lease or sell decision
Steady Construction Company is considering selling excess machinery with a book value of $280,000 (original cost of $400,000 less accumulated depreciation of $120,000) for $244,000, less a 5% brokerage commission. Alternatively, the machinery can be leased for a total of $255,000 for five years, after which it is expected to have no residual value. During the period of the lease, Steady Construction Company's costs of repairs, insurance, and property tax expenses are expected to be $23,800.
a. Prepare a differential analysis, dated April 16, 2014, to determine whether Steady should lease (Alternative 1) or sell (Alternative 2) the machinery.
b. On the basis of the data presented, would it be advisable to lease or sell the machinery Explain.

Answer 3

Differential Analysis
Differential analysis is a technique that evaluates the cost difference between the alternatives by eliminating the sunk costs and the similar costs between the alternatives.
a.
Prepare a differential analysis to determine whether Company S should lease or sell the machinery.
Working note:
Calculate the amount of costs incurred for sell machinery (Alternative -1).
b.
Decision:
Company S should sell the machinery because the net income from the sale of machinery is $600 higher than lease of the machinery.

Question 4

Lease or sell
Jerrod Company owns a machine with a cost of $305,000 and accumulated depreciation of $45,000 that can be sold for $231,000, less a 5% sales commission. Alternatively, the machine can be leased by Jerrod Company for three years for a total of $243,000, at the end of which there is no residual value. In addition, the repair, insurance, and property tax expense that would be incurred by Jerrod Company on the machine would total $16,900 over the three years. Prepare a differential analysis on January 12, 2014, as to whether Jerrod Company should lease (Alternative 1) or sell (Alternative 2) the machine.
Timberlake Company owns equipment with a cost of $165,000 and accumulated depreciation of $60,000 that can be sold for $82,000, less a 6% sales commission. Alternatively, the equipment can be leased by Timberlake Company for five years for a total of $84,600, at the end of which there is no residual value. In addition, the repair, insurance, and property tax expense that would be incurred by Timberlake Company on the equipment would total $7,950 over the five years. Prepare a differential analysis on March 23, 2014, as to whether Timberlake Company should lease (Alternative 1) or sell (Alternative 2) the equipment.

Question 5

Differential analysis involving opportunity costs
On October 1, White Way Stores Inc. is considering leasing a building and purchasing the necessary equipment to operate a retail store. Alternatively, the company could use the funds to invest in $180,000 of 6% U.S. Treasury bonds that mature in 16 years. The bonds could be purchased at face value. The following data have been assembled:

Instructions
1. Prepare a differential analysis as of October 1, 2014, presenting the proposed operation of the store for the 16 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2).
2. Based on the results disclosed by the differential analysis, should the proposal be accepted
3. If the proposal is accepted, what would be the total estimated income from operations of the store for the 16 years

Question 6

Differential analysis involving opportunity costs
On July 1, Coastal Distribution Company is considering leasing a building and buying the necessary equipment to operate a public warehouse. Alternatively, the company could use the funds to invest in $740,000 of 5% U.S. Treasury bonds that mature in 14 years. The bonds could be purchased at face value. The following data have been assembled:

Instructions
1. Prepare a differential analysis as of July 1, 2014, presenting the proposed operation of the warehouse for the 14 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2).
2. Based on the results disclosed by the differential analysis, should the proposal be accepted
3. If the proposal is accepted, what is the total estimated income from operations of the warehouse for the 14 years

Question 7

Decision on accepting additional business
A manager of Varden Sporting Goods Company is considering accepting an order from an overseas customer. This customer has requested an order for 20,000 dozen golf balls at a price of $22 per dozen. The variable cost to manufacture a dozen golf balls is $18 per dozen. The full cost is $25 per dozen. Varden has a normal selling price of $35 per dozen. Var-den's plant has just enough excess capacity on the second shift to make the overseas order. What are some considerations in accepting or rejecting this order

Question 8

A company could sell a building for $250,000 or lease it for $2,500 per month. What would need to be considered in determining if the lease option would be preferred

Question 9

Differential analysis for a lease or buy decision
Norton Corporation is considering new equipment. The equipment can be purchased from an overseas supplier for $4,600. The freight and installation costs for the equipment are $590. If purchased, annual repairs and maintenance are estimated to be $620 per year over the four-year useful life of the equipment. Alternatively, Norton can lease the equipment from a domestic supplier for $1,800 per year for four years, with no additional costs. Prepare a differential analysis dated August 4, 2014, to determine whether Norton should lease (Alternative 1) or purchase (Alternative 2) the equipment. Hint: This is a "lease or buy" decision, which must be analyzed from the perspective of the equipment user, as opposed to the equipment owner.

Question 10

Discontinue a segment.
Product S has revenue of $149,000, variable cost of goods sold of $88,500, variable selling expenses of $24,500, and fixed costs of $40,000, creating a loss from operations of $4,000. Prepare a differential analysis as of September 12, 2014, to determine if Product S should be continued (Alternative 1) or discontinued (Alternative 2), assuming fixed costs are unaffected by the decision.
Product B has revenue of $39,500, variable cost of goods sold of $25,500, variable selling expenses of $16,500, and fixed costs of $15,000, creating a loss from operations of $17,500. Prepare a differential analysis as of May 9, 2014, to determine if Product B should be continued (Alternative 1) or discontinued (Alternative 2), assuming fixed costs are unaffected by the decision.

Question 11

Differential analysis for machine replacement proposal
Universal Graphic Printing Company is considering replacing a machine that has been used in its factory for four years. Relevant data associated with the operations of the old machine and the new machine, neither of which has any estimated residual value, are as follows:

Annual nonmanufacturing operating expenses and revenue are not expected to be affected by purchase of the new machine.
Instructions
1. Prepare a differential analysis as of April 30, 2014, comparing operations using the present machine (Alternative 1) with operations using the new machine (Alternative 2). The analysis should indicate the total differential income that would result over the six-year period if the new machine is acquired.
2. List other factors that should be considered before a final decision is reached.

Question 12

Differential analysis for machine replacement proposal
Flint Tooling Company is considering replacing a machine that has been used in its factory for two years. Relevant data associated with the operations of the old machine and the new machine, neither of which has any estimated residual value, are as follows:

Instructions
1. Prepare a differential analysis as of November 8, 2014, comparing operations using the present machine (Alternative 1) with operations using the new machine (Alternative 2). The analysis should indicate the differential income that would result over the six-year period if the new machine is acquired.
2. List other factors that should be considered before a final decision is reached.

Question 13

Accept business at a special price
If you are not familiar with Priceline.com Inc. , go to its Web site. Assume that an individual "names a price" of $85 on Priceline.com for a room in Seattle, Washington, on April 22. Assume that April 22 is a Saturday, with low expected room demand in Seattle at a Marriott International, Inc. , hotel, so there is excess room capacity. The fully allocated cost per room per day is assumed from hotel records as follows:

Should Marriott accept the customer bid for a night in Seattle on April 22 at a price of $85

Question 14

A chemical company has a commodity-grade and premium-grade product. Why might the company elect to process the commodity-grade product further to the premium-grade product

Question 15

Differential analysis for a discontinued product
A condensed income statement by product line for Celestial Beverage Inc. indicated the following for Star Cola for the past year:

It is estimated that 15% of the cost of goods sold represents fixed factory overhead costs and that 25% of the operating expenses are fixed. Since Star Cola is only one of many products, the fixed costs will not be materially affected if the product is discontinued.
a. Prepare a differential analysis, dated January 21, 2014, to determine whether Star Cola should be continued (Alternative 1) or discontinued (Alternative 2).
b. Should Star Cola be retained Explain.

Question 16

Make or buy
A restaurant bakes its own bread for $152 per unit (100 loaves), including fixed costs of $39 per unit. A proposal is offered to purchase bread from an outside source for $105 per unit, plus $12 per unit for delivery. Prepare a differential analysis dated August 16, 2014, to determine whether the company should make (Alternative 1) or buy (Alternative 2) the bread, assuming fixed costs are unaffected by the decision.
A company manufactures various sized plastic bottles for its medicinal product. The manufacturing cost for small bottles is $67 per unit (100 bottles), including fixed costs of $22 per unit. A proposal is offered to purchase small bottles from an outside source for $35 per unit, plus $5 per unit for freight. Prepare a differential analysis dated March 30, 2014, to determine whether the company should make (Alternative 1) or buy (Alternative 2) the bottles, assuming fixed costs are unaffected by the decision.

Question 17

Differential analysis for sales promotion proposal
Essence of Esther Cosmetics Company is planning a one-month campaign for September to promote sales of one of its two cosmetics products. A total of $150,000 has been budgeted for advertising, contests, redeemable coupons, and other promotional activities. The following data have been assembled for their possible usefulness in deciding which of the products to select for the campaign:

No increase in facilities would be necessary to produce and sell the increased output. It is anticipated that 24,000 additional units of moisturizer or 20,000 additional units of perfume could be sold without changing the unit selling price of either product.
Instructions
1. Prepare a differential analysis as of August 21, 2014, to determine whether to promote moisturizer (Alternative 1) or perfume (Alternative 2).
2. The sales manager had tentatively decided to promote perfume, estimating that operating income would be increased by $30,000 ($9 operating income per unit for 20,000 units, less promotion expenses of $150,000). The manager also believed that the selection of moisturizer would reduce operating income by $30,000 ($5 operating income per unit for 24,000 units, less promotion expenses of $150,000). State briefly your reasons for supporting or opposing the tentative decision.

Question 18

Differential analysis for sales promotion proposal
Sole Mates Inc. is planning a one-month campaign for July to promote sales of one of its two shoe products. A total of $100,000 has been budgeted for advertising, contests, redeemable coupons, and other promotional activities. The following data have been assembled for their possible usefulness in deciding which of the products to select for the campaign.

No increase in facilities would be necessary to produce and sell the increased output. It is anticipated that 7,000 additional units of tennis shoes or 7,000 additional units of walking shoes could be sold without changing the unit selling price of either product.
Instructions
1. Prepare a differential analysis as of June 19, 2014, to determine whether to promote tennis shoes (Alternative 1) or walking shoes (Alternative 2).
2. The sales manager had tentatively decided to promote walking shoes, estimating that operating income would be increased by $5,000 ($15 operating income per unit for 7,000 units, less promotion expenses of $100,000). The manager also believed that the selection of tennis shoes would reduce operating income by $37,000 ($9 operating income per unit for 7,000 units, less promotion expenses of $100,000). State briefly your reasons for supporting or opposing the tentative decision.

Question 19

Cost-plus and target costing concepts
The following conversation took place between Juanita Jackson, vice president of marketing, and Les Miles, controller of Diamond Computer Company:
Juanita: I am really excited about our new computer coming out. I think it will be a real market success.
Les: I'm really glad you think so. I know that our success will be determined by our price. If our price is too high, our competitors will be the ones with the market success.
Juanita: Don't worry about it. We'll just mark our product cost up by 25% and it will all work out. I know we'll make money at those markups. By the way, what does the estimated product cost look like
Les: Well, there's the rub. The product cost looks as if it's going to come in at around $1,200. With a 25% markup, that will give us a selling price of $1,500.
Juanita: I see your concern. That's a little high. Our research indicates that computer prices are dropping and that this type of computer should be selling for around $1,250 when we release it to the market.
Les: I'm not sure what to do.
Juanita: Let me see if I can help. How much of the $1,200 is fixed cost
Les: About $200.
Juanita: There you go. The fixed cost is sunk. We don't need to consider it in our pricing decision. If we reduce the product cost by $200, the new price with a 25% markup would be right at $1,250. Boy, I was really worried for a minute there. I knew something wasn't right.
a. If you were Les, how would you respond to Juanita's solution to the pricing problem
b. How might target costing be used to help solve this pricing dilemma

Question 20

A company accepts incremental business at a special price that exceeds the variable cost. What other issues must the company consider in deciding whether to accept the business

Question 21

Differential analysis for a discontinued product OBJ. 1
The condensed product-line income statement for Dish N' Dat Company for the month of March is as follows:

Fixed costs are 15% of the cost of goods sold and 40% of the selling and administrative expenses. Dish N' Dat assumes that fixed costs would not be materially affected if the Cups line were discontinued.
a. Prepare a differential analysis dated March 31, 2014, to determine if Cups should be continued (Alternative 1) or discontinued (Alternative 2).
b. Should the Cups line be retained Explain.

Question 22

Replace equipment
A machine with a book value of $126,000 has an estimated six-year life. A proposal is offered to sell the old machine for $98,000 and replace it with a new machine at a cost of $155,000. The new machine has a six-year life with no residual value. The new machine would reduce annual direct labor costs from $68,000 to $58,000. Prepare a differential analysis dated February 18, 2014, on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2).
A machine with a book value of $80,000 has an estimated five-year life. A proposal is offered to sell the old machine for $50,500 and replace it with a new machine at a cost of $75,000. The new machine has a five-year life with no residual value. The new machine would reduce annual direct labor costs from $11,200 to $7,400. Prepare a differential analysis dated April 11, 2014, on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2).

Question 23

Differential analysis for further processing
The management of Dominican Sugar Company is considering whether to process further raw sugar into refined sugar. Refined sugar can be sold for $2.20 per pound, and raw sugar can be sold without further processing for $1.40 per pound. Raw sugar is produced in batches of 42,000 pounds by processing 100,000 pounds of sugar cane, which costs $0.35 per pound of cane. Refined sugar will require additional processing costs of $0.50 per pound of raw sugar, and 1.25 pounds of raw sugar will produce 1 pound of refined sugar.
Instructions
1. Prepare a differential analysis as of March 24, 2014, to determine whether to sell raw sugar (Alternative 1) or process further into refined sugar (Alternative 2).
2. Briefly report your recommendations
.

Question 24

Differential analysis for further processing
The management of International Aluminum Co. is considering whether to process aluminum ingot further into rolled aluminum. Rolled aluminum can be sold for $2,200 per ton, and ingot can be sold without further processing for $1,100 per ton. Ingot is produced in batches of 80 tons by smelting 500 tons of bauxite, which costs $105 per ton of bauxite. Rolled aluminum will require additional processing costs of $620 per ton of ingot, and 1.25 tons of ingot will produce 1 ton of rolled aluminum (due to trim losses).
Instructions
1. Prepare a differential analysis as of February 5, 2014, to determine whether to sell aluminum ingot (Alternative 1) or process further into rolled aluminum (Alternative 2).
2. Briefly report your recommendations.

Question 25

Pricing decisions and markup on variable costs Group Project
Many businesses are offering their products and services over the Internet. Some of these companies and their Internet addresses are listed below.

a. In groups of three, assign each person in your group to one of the Internet sites listed above. For each site, determine the following:
1. A product (or service) description.
2. A product price.
3. A list of costs that are required to produce and sell the product selected in part (1) as listed in the annual report on SEC Form 10-K.
4. Whether the costs identified in part (3) are fixed costs or variable costs.
b. Which of the three products do you believe has the largest markup on variable cost

Question 26

A company fabricates a component at a cost of $6.00. A supplier offers to supply the same component for $5-50. Under what circumstances is it reasonable to purchase from the supplier

Question 27

Segment analysis
Charles Schwab Corporation is one of the more innovative brokerage and financial service
companies in the United States. The company recently provided information about its
major business segments as follows (in millions):

a. How does a brokerage company like Schwab define the "Investor Services" and "Institutional Services" segments Use the Internet to develop your answer.
b. Provide a specific example of a variable and fixed cost in the "Investor Services" segment.
c. Estimate the contribution margin for each segment, assuming depreciation represents the majority of fixed costs.
d. If Schwab decided to sell its "Institutional Services" accounts to another company, estimate how much operating income would decline.

Question 28

Process or sell
Product T is produced for $3.90 per pound. Product T can be sold without additional processing for $4.65 per pound, or processed further into Product U at an additional cost of $0.58 per pound. Product U can be sold for $5.30 per pound. Prepare a differential analysis dated August 2, 2014, on whether to sell Product T (Alternative 1) or process further into Product U (Alternative 2).
Product D is produced for $24 per gallon. Product D can be sold without additional processing for $36 per gallon, or processed further into Product E at an additional cost of $9 per gallon. Product E can be sold for $43 per gallon. Prepare a differential analysis dated February 26, 2014, on whether to sell Product D (Alternative 1) or process further into Product E (Alternative 2).

Question 29

Product pricing using the cost-plus approach concepts; OBJ. 1, 2, and Appendix differential analysis for accepting additional business
Crystal Displays Inc. recently began production of a new product, flat panel displays, which required the investment of $1,500,000 in assets. The costs of producing and selling 5,000 units of flat panel displays are estimated as follows:

Crystal Displays Inc. is currently considering establishing a selling price for flat panel displays. The president of Crystal Displays has decided to use the cost-plus approach to product pricing and has indicated that the displays must earn a 15% rate of return on invested assets.
Instructions
1. Determine the amount of desired profit from the production and sale of flat panel displays.
2. Assuming that the product cost concept is used, determine (a) the cost amount per unit, (b) the markup percentage, and (c) the selling price of flat panel displays.
3. Appendix Assuming that the total cost concept is used, determine (a) the cost amount per unit, (b) the markup percentage (rounded to two decimal places), and (c) the selling price of flat panel displays (rounded to nearest whole dollar).
4. Appendix Assuming that the variable cost concept is used, determine (a) the cost amount per unit, (b) the markup percentage (rounded to two decimal places), and (c) the selling price of flat panel displays (rounded to nearest whole dollar).
5. Comment on any additional considerations that could influence establishing the selling price for flat panel displays.
6. Assume that as of August 1, 2014, 3,000 units of flat panel displays have been produced and sold during the current year. Analysis of the domestic market indicates that 2,000 additional units are expected to be sold during the remainder of the year at the normal product price determined under the product cost concept. On August 3, Crystal Displays Inc. received an offer from Maple Leaf Visual Inc. for 800 units of flat panel displays at $225 each. Maple Leaf Visual Inc. will market the units in Canada under its own brand name, and no variable selling and administrative expenses associated with the sale will be incurred by Crystal Displays Inc. The additional business is not expected to affect the domestic sales of flat panel displays, and the additional units could be produced using existing factory, selling, and administrative capacity.
a. Prepare a differential analysis of the proposed sale to Maple Leaf Visual Inc.
b. Based on the differential analysis in part (a), should the proposal be accepted

Question 30

Product pricing using the cost-plus approach concepts;differential analysis for accepting additional business
Night Glow Inc. recently began production of a new product, the halogen light, which required the investment of $600,000 in assets. The costs of producing and selling 10,000 halogen lights are estimated as follows:

Night Glow Inc. is currently considering establishing a selling price for the halogen light. The president of Night Glow Inc. has decided to use the cost-plus approach to product pricing and has indicated that the halogen light must earn a 10% rate of return on invested assets.
Instructions
1. Determine the amount of desired profit from the production and sale of the halogen light.
2. Assuming that the product cost concept is used, determine (a) the cost amount per unit, (b) the markup percentage, and (c) the selling price of the halogen light.
3. Appendix Assuming that the total cost concept is used, determine (a) the cost amount per unit, (b) the markup percentage (rounded to two decimal places), and (c) the selling price of the halogen light (rounded to the nearest whole dollar).
4. Appendix Assuming that the variable cost concept is used, determine (a) the cost amount per unit, (b) the markup percentage (rounded to two decimal places), and (c) the selling price of the halogen light (rounded to nearest whole dollar).
5. Comment on any additional considerations that could influence establishing the selling price for the halogen light.
6. Assume that as of September 1, 2014, 7,000 units of halogen light have been produced and sold during the current year. Analysis of the domestic market indicates that 3,000 additional units of the halogen light are expected to be sold during the remainder of the year at the normal product price determined under the product cost concept. On September 5, Night Glow Inc. received an offer from Tokyo Lighting Inc. for 1,600 units of the halogen light at $57 each. Tokyo Lighting Inc. will market the units in Japan under its own brand name, and no variable selling and administrative expenses associated with the sale will be incurred by Night Glow Inc. The additional business is not expected to affect the domestic sales of the halogen light, and the additional units could be produced using existing productive, selling, and administrative capacity.
a. Prepare a differential analysis of the proposed sale to Tokyo Lighting Inc.
b. Based on the differential analysis in part (a), should the proposal be accepted

Question 31

Identifying product cost distortion
Peachtree Beverage Company manufactures soft drinks. Information about two products is as follows:

It is known that both products have the same direct materials and direct labor costs per case. Peachtree Beverage allocates factory overhead to products by using a single plantwide factory overhead rate, based on direct labor cost. Additional information about the two products is as follows:
Jamaican Punch: Requires extensive process preparation and sterilization prior to processing. The ingredients are from Jamaica, requiring complex import controls. The formulation is complex, and it is thus difficult to maintain quality. Lastly, the product is produced in small production run sizes.
King Kola: Requires minor process preparation and sterilization prior to processing. The ingredients are acquired locally. The formulation is simple, and it is easy to maintain quality. Lastly, the product is produced in large production run sizes.
Explain the weakness in the per-case product profitability report in light of the additional data.

Question 32

Many fast-food restaurant chains, such as McDonald's , will occasionally discontinue restaurants in their system. What are some financial considerations in deciding to eliminate a store

Question 33

Decision to discontinue a product
On the basis of the following data, the general manager of Featherweight Shoes Inc. decided to discontinue Children's Shoes because it reduced income from operations by $17,000. What is the flaw in this decision, if it is assumed fixed costs would not be materially affected by the discontinuance

Question 34

Accept business at special price
Product R is normally sold for $52 per unit. A special price of $39 is offered for the export market. The variable production cost is $31 per unit. An additional export tariff of 25% of revenue must be paid for all export products. Assume there is sufficient capacity for the special order. Prepare a differential analysis dated October 23, 2014, on whether to reject (Alternative 1) or accept (Alternative 2) the special order.
Product A is normally sold for $9.60 per unit. A special price of $7.20 is offered for the export market. The variable production cost is $5.00 per unit. An additional export tariff of 15% of revenue must be paid for all export products. Assume there is sufficient capacity for the special order. Prepare a differential analysis dated March 16, 2014, on whether to reject (Alternative 1) or accept (Alternative 2) the special order.

Question 35

Product pricing and profit analysis with bottleneck operations
Hercules Steel Company produces three grades of steel: high, good, and regular grade. Each of these products (grades) has high demand in the market, and Hercules is able to sell as much as it can produce of all three. The furnace operation is a bottleneck in the process and is running at 100% of capacity. Hercules wants to improve steel operation profitability. The variable conversion cost is $15 per process hour. The fixed cost is $200,000. In addition, the cost analyst was able to determine the following information about the three products:
.
The furnace operation is part of the total process for each of these three products. Thus, for example, 4.0 of the 12.0 hours required to process High Grade steel are associated with the furnace.
Instructions
1. Determine the unit contribution margin for each product.
2. Provide an analysis to determine the relative product profitability, assuming that the furnace is a bottleneck.

Question 36

Product pricing and profit analysis with bottleneck operations
Wilmington Chemical Company produces three products: ethylene, butane, and ester. Each of these products has high demand in the market, and Wilmington Chemical is able to sell as much as it can produce of all three. The reaction operation is a bottleneck in the process and is running at 100% of capacity. Wilmington wants to improve chemical operation profitability. The variable conversion cost is $10 per process hour. The fixed cost is $400,000. In addition, the cost analyst was able to determine the following information about the three products:

Instructions
1. Determine the unit contribution margin for each product.
2. Provide an analysis to determine the relative product profitabilities, assuming that the reactor is a bottleneck.

Question 37

In the long run, the normal selling price must be set high enough to cover what factors

Question 38

Make-or-buy decision
Eclipse Computer Company has been purchasing carrying cases for its portable computers at a delivered cost of $65 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 40% of direct labor cost. The fully absorbed unit costs to produce comparable carrying cases are expected to be as follows:

If Eclipse Computer Company manufactures the carrying cases, fixed factory overhead costs will not increase and variable factory overhead costs associated with the cases are expected to be 15% of the direct labor costs.
a. Prepare a differential analysis, dated July 19, 2014, to determine whether the company should make (Alternative 1) or buy (Alternative 2) the carrying case.
b. On the basis of the data presented, would it be advisable to make the carrying cases or to continue buying them Explain.

Question 39

Product cost markup percentage
Crystal Lighting Inc. produces and sells lighting fixtures. An entry light has a total cost of $80 per unit, of which $54 is product cost and $26 is selling and administrative expenses. In addition, the total cost of $80 is made up of $40 variable cost and $40 fixed cost. The desired profit is $55 per unit. Determine the markup percentage on product cost.
Green Thumb Garden Tools Inc. produces and sells home and garden tools and equipment. A lawnmower has a total cost of $230 per unit, of which $160 is product cost and $70 is selling and administrative expenses. In addition, the total cost of $230 is made up of $120 variable cost and $110 fixed cost. The desired profit is $58 per unit. Determine the markup percentage on product cost.

Question 40

Activity-based costing
Pure Cane Sugar Company manufactures three products (white sugar, brown sugar, and powdered sugar) in a continuous production process. Senior management has asked the controller to conduct an activity-based costing study. The controller identified the amount of factory overhead required by the critical activities of the organization as follows:

The activity bases identified for each activity are as follows:

The activity-base usage quantities and units produced for the three products were determined from corporate records and are as follows:
.
Instructions
1 Determine the activity rate for each activity.
2. Determine the total and per-unit activity costs for all three products.
3 Why aren't the activity unit costs equal across all three products, since they require the same machine time per unit

Question 41

Activity-based costing
Southeastern Paper Company manufactures three products (computer paper, newsprint, and specialty paper) in a continuous production process. Senior management has asked the controller to conduct an activity-based costing study. The controller identified the amount of factory overhead required by the critical activities of the organization as follows:

The activity bases identified for each activity are as follows:

The activity-base usage quantities and units produced for the three products were determined from corporate records and are as follows:

Instructions
1 Determine the activity rate for each activity.
2 Determine the total and per-unit activity cost for all three products.
3 Why aren't the activity unit costs equal across all three products, since they require the same machine time per unit

Question 42

Although the cost-plus approach to product pricing may be used by management as a general guideline, what are some examples of other factors that managers should also consider in setting product prices

Question 43

Make-or-buy decision
The Theater Arts Guild of Dallas (TAG-D) employs five people in its Publication Department. These people lay out pages for pamphlets, brochures, magazines, and other publications for the TAG-D productions. The pages are delivered to an outside company for printing. The company is considering an outside publication service for the layout work. The outside service is quoting a price of $13 per layout page. The budget for the Publication Department for 2014 is as follows:

The department expects to lay out 25,000 pages for 2014. The computers used by the department have an estimated residual value of $9,000. The Publication Department office space and equipment would be used for future administrative needs, if the department's function were purchased from the outside.
a. Prepare a differential analysis dated February 22, 2014, to determine whether TAG-D should lay out pages internally (Alternative 1) or purchase layout services from the outside (Alternative 2).
b. On the basis of your analysis in part (a), should the page layout work be purchased from an outside company
c. What additional considerations might factor into the decision making

Question 44

Bottleneck profit
Product A has a unit contribution margin of $24. Product B has a unit contribution margin of $30. Product A requires four testing hours, while Product B requires six testing hours. Determine the most profitable product, assuming the testing is a constraint.
Product K has a unit contribution margin of $120. Product L has a unit contribution margin of $100. Product K requires five furnace hours, while Product L requires four furnace hours. Determine the most profitable product, assuming the furnace is a constraint.

Question 45

How does the target cost concept differ from cost-plus approaches

Question 46

Machine replacement decision
A company is considering replacing an old piece of machinery, which cost $600,000 and has $350,000 of accumulated depreciation to date, with a new machine that costs $528,000. The old machine could be sold for $82,000. The annual variable production costs associated with the old machine are estimated to be $167,000 per year for eight years. The annual variable production costs for the new machine are estimated to be $109,000 per year for eight years.
a. Prepare a differential analysis dated September 11, 2014, to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine.
b. What is the sunk cost in this situation

Question 47

Activity-based costing
Wave Wake Marine Company has total estimated factory overhead for the year of $1,200,000, divided into four activities: fabrication, $450,000; assembly, $210,000; setup, $240,000; and inspection, $300,000. Wave Wake manufactures two types of boats: a speedboat and a bass boat. The activity-base usage quantities for each product by each activity are as follows:

Each product is budgeted for 200 units of production for the year. Determine (a) the activity rates for each activity and (b) the factory overhead cost per unit for each product, using activity-based costing.
Casual Cuts Inc. has total estimated factory overhead for the year of $225,000, divided into four activities: cutting, $90,000; sewing, $22,500; setup, $80,000; and inspection, $32,500. Casual Cuts manufactures two types of men's pants: jeans and khakis. The activity-base usage quantities for each product by each activity are as follows:

Each product is budgeted for 10,000 units of production for the year. Determine (a) the activity rates for each activity and (b) the factory overhead cost per unit for each product, using activity-based costing.

Question 48

What is the appropriate measure of a product's value when a firm is operating under production bottlenecks

Question 49

Differential analysis for machine replacement
Kim Kwon Digital Components Company assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $60,000, the accumulated depreciation is $24,000, its remaining useful life is five years, and its residual value is negligible. On May 4, 2014, a proposal was made to replace the present manufacturing procedure with a fully automatic machine that will cost $180,000. The automatic machine has an estimated useful life of five years and no significant residual value. For use in evaluating the proposal, the accountant accumulated the following annual data on present and proposed operations:

a. Prepare a differential analysis dated May 4, 2014, to determine whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). Prepare the analysis over the useful life of the new machine.
b. Based only on the data presented, should the proposal be accepted
c. What are some of the other factors that should be considered before a final decision is made

Question 50

Under what conditions might a company use activity-based costing to allocate factory overhead to products

Question 51

Sell or process further
Oakridge Lumber Company incurs a cost of $412 per hundred board feet in processing certain "rough-cut" lumber, which it sells for $586 per hundred board feet. An alternative is to produce a "finished cut" at a total processing cost of $536 per hundred board feet, which can be sold for $755 per hundred board feet. Prepare a differential analysis dated June 14, 2014, on whether to sell rough-cut lumber (Alternative 1) or process further into finished-cut lumber (Alternative 2).

Question 52

Sell or process further
Rise N' Shine Coffee Company produces Columbian coffee in batches of 6,000 pounds. The standard quantity of materials required in the process is 6,000 pounds, which cost $5.50 per pound. Columbian coffee can be sold without further processing for $9.22 per pound. Columbian coffee can also be processed further to yield Decaf Columbian, which can be sold for $11.88 per pound. The processing into Decaf Columbian requires additional processing costs of $10,230 per batch. The additional processing will also cause a 5% loss of product due to evaporation.
a. Prepare a differential analysis dated October 6, 2014, on whether to sell regular Columbian (Alternative 1) or process further into Decaf Columbian (Alternative 2).
b. Should Rise N' Shine sell Columbian coffee or process further and sell Decaf Columbian
c. Determine the price of Decaf Columbian that would cause neither an advantage nor a disadvantage for processing further and selling Decaf Columbian.

Question 53

Decision on accepting additional business
Homestead Jeans Co. has an annual plant capacity of 65,000 units, and current production is 45,000 units. Monthly fixed costs are $54,000, and variable costs are $29 per unit. The present selling price is $42 per unit. On November 12, 2014, the company received an offer from Dawkins Company for 18,000 units of the product at $32 each. Dawkins Company will market the units in a foreign country under its own brand name. The additional business is not expected to affect the domestic selling price or quantity of sales of Homestead Jeans Co.
a. Prepare a differential analysis on whether to reject (Alternative 1) or accept (Alternative 2) the Dawkins order.
b. Briefly explain the reason why accepting this additional business will increase operating income.
c. What is the minimum price per unit that would produce a positive contribution margin

Question 54

Accepting business at a special price
Portable Power Company expects to operate at 80% of productive capacity during July. The total manufacturing costs for July for the production of 25,000 batteries are budgeted as follows:

The company has an opportunity to submit a bid for 2,500 batteries to be delivered by July 31 to a government agency. If the contract is obtained, it is anticipated that the additional activity will not interfere with normal production during July or increase the selling or administrative expenses. What is the unit cost below which Portable Power Company should not go in bidding on the government contract

Question 55

Decision on accepting additional business
Goodman Tire and Rubber Company has capacity to produce 170,000 tires. Goodman presently produces and sells 130,000 tires for the North American market at a price of $125 per tire. Goodman is evaluating a special order from a European automobile company, Euro Motors. Euro is offering to buy 20,000 tires for $92 per tire. Goodman's accounting system indicates that the total cost per tire is as follows:

Goodman pays a selling commission equal to 5% of the selling price on North American orders, which is included in the variable portion of the selling and administrative expenses. However, this special order would not have a sales commission. If the order was accepted, the tires would be shipped overseas for an additional shipping cost of $6.50 per tire. In addition, Euro has made the order conditional on receiving European safety certification. Goodman estimates that this certification would cost $142,000.
a. Prepare a differential analysis dated January 21, 2014, on whether to reject (Alternative1) or accept (Alternative 2) the special order from Euro Motors.
b. What is the minimum price per unit that would be financially acceptable to Goodman

Question 56

Product cost concept of product pricing
Parisian Accessories Inc. produces women's handbags. The cost of producing 800 handbags is as follows:

The selling and administrative expenses are $24,000. The management desires a profit equal to 15% of invested assets of $200,000.
a. Determine the amount of desired profit from the production and sale of 800 handbags.
b. Determine the product cost per unit for the production of 800 handbags.
c. Determine the product cost markup percentage for handbags.
d. Determine the selling price of handbags.

Question 57

Product cost concept of product costing
Smart Stream Inc. uses the product cost concept of applying the cost-plus approach to product pricing. The costs of producing and selling 10,000 cellular phones are as follows:

Smart Stream desires a profit equal to a 30% rate of return on invested assets of $1,200,000.
a. Determine the amount of desired profit from the production and sale of 10,000 cellular phones.
b. Determine the product cost and the cost amount per unit for the production of 10,000 cellular phones.
c. Determine the product cost markup percentage for cellular phones.
d. Determine the selling price of cellular phones.

Question 58

Target costing
Toyota Motor Corporation uses target costing. Assume that Toyota marketing personnel estimate that the competitive selling price for the Camry in the upcoming model year will need to be $28,000. Assume further that the Camry's total unit cost for the upcoming model year is estimated to be $23,200 and that Toyota requires a 20% profit margin on selling price (which is equivalent to a 25% markup on total cost).
a. What price will Toyota establish for the Camry for the upcoming model year
b. What impact will target costing have on Toyota, given the assumed information

Question 59

Target costing
Instant Image Inc. manufactures color laser printers. Model J20 presently sells for $460 and has a product cost of $230, as follows:

It is estimated that the competitive selling price for color laser printers of this type will drop to $400 next year. Instant Image has established a target cost to maintain its historical markup percentage on product cost. Engineers have provided the following cost reduction ideas:
1. Purchase a plastic printer cover with snap-on assembly, rather than with screws. This will reduce the amount of direct labor by 15 minutes per unit.
2. Add an inspection step that will add six minutes per unit of direct labor but reduce the materials cost by $20 per unit.
3. Decrease the cycle time of the injection molding machine from four minutes to three minutes per part. Forty percent of the direct labor and 48% of the factory overhead are related to running injection molding machines.
The direct labor rate is $30 per hour.
a. Determine the target cost for Model J20, assuming that the historical markup on product cost and selling price is maintained.
b. Determine the required cost reduction.
c. Evaluate the three engineering improvements together to determine if the required cost reduction (drift) can be achieved
.

Question 60

Product decisions under bottlenecked operations
Mill Metals Inc. has three grades of metal product, Type 5, Type 10, and Type 20. Financial data for the three grades are as follows:

Mill's operations require all three grades to be melted in a furnace before being formed. The furnace runs 24 hours a day, 7 days a week, and is a production bottleneck. The furnace hours required per unit of each product are as follows:

The Marketing Department is considering a new marketing and sales campaign.
Which product should be emphasized in the marketing and sales campaign in order to maximize profitability

Question 61

Product decisions under bottlenecked operations
Youngstown Glass Company manufactures three types of safety plate glass: large, medium, and small. All three products have high demand. Thus, Youngstown Glass is able to sell all the safety glass that it can make. The production process includes an autoclave operation, which is a pressurized heat treatment. The autoclave is a production bottleneck. Total fixed costs are $85,000 for the company as a whole. In addition, the following information is available about the three products:

a. Determine the contribution margin by glass type and the total company income from operations for the budgeted units of production.
b. Prepare an analysis showing which product is the most profitable per bottleneck hour.

Question 62

Activity-based costing
CardioTrainer Equipment Company manufactures stationary bicycles and treadmills. The products are produced in the Fabrication and Assembly production departments. In addition to production activities, several other activities are required to produce the two products. These activities and their associated activity rates are as follows:

The activity-base usage quantities and units produced for each product were as follows:

Use the activity rate and usage information to compute the total activity costs and the activity costs per unit for each product.

Question 63

Activity-based costing
Zeus Industries manufactures two types of electrical power units, custom and standard, which involve four factory overhead activities-production setup, procurement, quality control, and materials management. An activity analysis of the overhead revealed the following estimated activity costs and activity bases for these activities:

The activity-base usage quantities for each product are as follows:

a. Determine an activity rate for each activity.
b. Assign activity costs to each product, and determine the unit activity cost, using the activity rates from part (a).
c. Assume that each product required one direct labor hour per unit. Determine the per-unit cost if factory overhead is allocated on the basis of direct labor hours.
d. Explain why the answers in parts (b) and (c) are different.

Question 64

Activity rates and product costs using activity-based costing
BriteLite Inc. manufactures entry and dining room lighting fixtures. Five activities are used in manufacturing the fixtures. These activities and their associated activity costs and activity bases are as follows:

Corporate records were obtained to estimate the amount of activity to be used by the two products. The estimated activity-base usage quantities and units produced for each product and in total are provided in the table below.

a. Determine the activity rate for each activity.
b. Use the activity rates in (a) to determine the total and per-unit activity costs associated with each product.

Question 65

Total cost concept of product pricing
Based on the data presented in Exercise 25-17, assume that Smart Stream Inc. uses the total cost concept of applying the cost-plus approach to product pricing.
a. Determine the total costs and the total cost amount per unit for the production and sale of 10,000 cellular phones.
b. Determine the total cost markup percentage (rounded to two decimal places) for cellular phones.
c. Determine the selling price of cellular phones. Round to the nearest dollar.

Question 66

Variable cost concept of product pricing
Based on the data presented in Exercise 25-17, assume that Smart Stream Inc. uses the variable cost concept of applying the cost-plus approach to product pricing.
a. Determine the variable costs and the variable cost amount per unit for the production and sale of 10,000 cellular phones.
b. Determine the variable cost markup percentage (rounded to two decimal places) for cellular phones.
c. Determine the selling price of cellular phones. Round to the nearest dollar.