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Exam 6: Differential Analysis: The Key to Decision Making

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Question 41

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A study has been conducted to determine if Product A should be dropped. Sales of the product total $200,000 per year; variable expenses total $140,000 per year. Fixed expenses charged to the product total $90,000 per year. The company estimates that $40,000 of these fixed expenses will continue even if the product is dropped. These data indicate that if Product A is dropped, the company's overall net operating income would:

A) decrease by $20,000 per year
B) increase by $20,000 per year
C) decrease by $10,000 per year
D) increase by $30,000 per year

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Question 42

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The book value of a machine, as shown on the balance sheet, is relevant in a decision concerning the replacement of that machine by another machine.

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Question 43

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How much profit (loss) does the company make by processing the intermediate product cane juice into molasses rather than selling it as is?

Suppose that regular sales of jigs total 85,000 units per month. All other conditions remain the same. If Immanuel accepts the special order, the change in monthly net operating income will be:

Future costs that do not differ among the alternatives are not relevant in a decision.

Part I51 is used in one of Pries Corporation's products. The company makes 18,000 units of this part each 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 this part and sell it to the company for $15.80 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. If the outside supplier's offer were accepted, only $26,000 of these allocated general overhead costs would be avoided. If management decides to buy part I51 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?

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 this constrained resource?

Sunk costs are considered to be avoidable costs.

Joint production costs are relevant costs in decisions about what to do with a product from the split-off point onward in the production process.

When there is a production constraint, a company should emphasize the products with:

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 $41.60 per unit. By how much would this special order increase (decrease) the company's net operating income for the month?

The sunk cost in this situation is:

What would be the effect on the company's overall net operating income if product R89H were dropped?

Costs associated with two alternatives, code-named Q and R, being considered by Corniel Corporation 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?

A decision by Cosmo Inc. to close the Town Store would result in a monthly increase (decrease) in Cosmo's operating income of:

The Hayes Company manufactures and sells several products, one of which is called a slip differential. The company normally sells 30,000 units of the slip differential each month. At this activity level, unit costs are: An outside supplier has offered to produce the slip differentials for the Hayes Company, and to ship them directly to the Hayes Company's customers. This arrangement would permit the Hayes Company to reduce its variable selling expenses by one third (due to elimination of freight costs). The facilities now being used to produce the slip differentials would be idle and fixed manufacturing overhead would continue at 60 percent of its present level. The total fixed selling expenses of the company would be unaffected by this decision. Required: What is the maximum acceptable price quotation for the slip differentials from the outside supplier?

According to the company's accounting system, what is the net operating income earned by product R89H?

Bady Inc. makes a range of products. The company's predetermined overhead rate is $14 per direct labor-hour, which was calculated using the following budgeted data: Component M3 is used in one of the company's products. The unit cost of the component according to the company's cost accounting system is determined as follows: An outside supplier has offered to supply component M3 for $108 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. Bady chronically has idle capacity. Required: Is the offer from the outside supplier financially attractive? Why?

What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 60,000 units required each year?

Which product makes the MOST profitable use of the grinding machines?