Exam 9: Differential Analysis: the Key to Decision Making

Rama Corporation is presently making part J56 that is used in one of its products. A total of 4,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity: An outside supplier has offered to produce and sell the part to the company for $30.80 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, none of which would be avoided if the part were purchased instead of produced internally. -If management decides to buy part J56 from the outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income?

The Milham Corporation has two divisions-East and West. The divisions have the following revenues and expenses: Management at Milham is considering the elimination of the West Division. If the West Division were eliminated, its traceable fixed costs could be avoided. Total common corporate costs would be unaffected by this decision. Given these data, the elimination of the West Division would result in an overall company net operating income of:

Jebb's Lettuce Stand currently sells 60,000 heads of lettuce each year for $1.00 per head. Jebb is thinking of expanding operations and serving the customer better by purchasing a "slice and dice" machine that will cut up each head of lettuce into bite-size pieces that can be used for salads. Jebb expects he will then be able to sell his lettuce for $1.70 per head. Jebb has prepared the following analysis for each option based on sales of 60,000 heads of lettuce: -Based on the information above, what will be Jebb's increase or decrease in profit for the year if he chooses to start slicing up the lettuce instead of selling it whole?

The constraint at Johngrass Corporation is time on a particular machine. The company makes three products that use this machine. Data concerning those products appear below: Assume that sufficient time is available on the constrained machine 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?

Mankus Inc. is considering using stocks of an old raw material in a special project. The special project would require all 120 kilograms of the raw material that are in stock and that originally cost the company $816 in total. If the company were to buy new supplies of this raw material on the open market, it would cost $7.25 per kilogram. However, the company has no other use for this raw material and would sell it at the discounted price of $6.75 per kilogram if it were not used in the special project. The sale of the raw material would involve delivery to the purchaser at a total cost of $50 for all 120 kilograms. What is the relevant cost of the 120 kilograms of the raw material when deciding whether to proceed with the special project?

One way to increase the effective utilization of a bottleneck is to put less emphasis on preventing defects and simply discard defective units at final inspection before sending them to customers.

Kampmann Corporation is presently making part Z95 that is used in one of its products. A total of 5,000 units of this part are produced and used every year. 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 $24.10 each. If this offer is accepted, the supervisor's salary and all of the variable costs 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, none of which would be avoided if the part were purchased instead of produced internally. If management decides to buy part Z95 from the outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income?

A customer has requested that Gamba Corporation fill a special order for 3,000 units of product Q41 for $25.00 a unit. While the product would be modified slightly for the special order, product Q41's normal unit product cost is $21.40: 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 Q41 that would increase the variable costs by $7.00 per unit and that would require an investment of $15,000 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:

Bulan Inc. makes a range of products. The company's predetermined overhead rate is $20 per direct labor-hour, which was calculated using the following budgeted data: Component T6 is used in one of the company's products. The unit product cost of the component according to the company's cost accounting system is determined as follows: An outside supplier has offered to supply component T6 for $101 each. The outside supplier is known for quality and reliability. Assume that direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by this decision. Bulan chronically has idle capacity. Required: Is the offer from the outside supplier financially attractive? Why?

The Melrose Corporation produces a single product, Product C. Melrose has the capacity to produce 70,000 units of Product C each year. If Melrose produces at capacity, the per unit costs to produce and sell one unit of Product C are as follows: The regular selling price of one unit of Product C is $100. A special order has been received by Melrose from Moore Corporation to purchase 7,000 units of Product C during the upcoming year. If this special order is accepted, the variable selling expense will be reduced by 75%. Total fixed manufacturing overhead and fixed selling expenses would be unaffected except that Melrose will need to purchase a specialized machine to engrave the Moore name on each unit of product C in the special order. The machine will cost $10,500 and will have no use after the special order is filled. Assume that direct labor is a variable cost. -Suppose Melrose can sell 68,000 units of Product C to regular customers next year. If Moore Corporation offers to buy the special order units at $90 per unit, the effect of accepting the special order for 7,000 units on Melrose's net operating income for next year will be a:

Dowchow Corporation makes two products from a common input. Joint processing costs up to the split-off point total $38,400 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: -What is the net monetary advantage (disadvantage) of processing Product X beyond the split-off point?

Consider the following statements: I. A division's net operating income, after deducting both traceable and allocated common fixed costs, is negative. II) The division's avoidable fixed costs exceed its contribution margin. III) The division's traceable fixed costs plus its allocated common corporate costs exceed its contribution margin. Which of the above statements is a valid reason for eliminating the division?

In a special order situation, any fixed cost that could be avoided if the special order were not accepted would be irrelevant.

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 the intermediate product beet juice into refined sugar rather than selling it as is?

Roddey 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 2,900 units of component GEE. Each unit of GEE requires 3 units of material R39 and 8 units of material I59. Data concerning these two materials follow: Material R39 is in use in many of the company's products and is routinely replenished. Material I59 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 GEE?

The constraint at Fulena Inc. is an expensive milling machine. The three products listed below use this constrained resource. Required: a. Rank the products in order of their current profitability from the most profitable to the least profitable. In other words, rank the products in the order in which they should be emphasized. Show your work! b. 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?

Dowchow Corporation makes two products from a common input. Joint processing costs up to the split-off point total $38,400 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: -What is the net monetary advantage (disadvantage) of processing Product Y beyond the split-off point?

One of the advantages of allocating common fixed costs to a product is that such allocations more accurately reflect the product's true profitability.

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 will have no effect on other product lines. If the company drops Product G, the change in annual net operating income due to this decision will be a:

Fabio Corporation is considering eliminating a department that has a contribution margin of $30,000 and $60,000 in fixed costs. Of the fixed costs, $15,000 cannot be avoided. The effect of eliminating this department on Fabio's overall net operating income would be: