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Exam 6: Differential Analysis: the Key to Decision Making

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Question 1

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Fixed costs are sunk costs.

A) True
B) False

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Question 2

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Swagger Corporation purchases potatoes from farmers. The potatoes are then peeled, producing two intermediate products-peels and depeeled spuds. The peels can then be processed further to make a cocktail of organic nutrients. And the depeeled spuds can be processed further to make frozen french fries. A batch of potatoes costs $63 to buy from farmers and $12 to peel in the company's plant. The peels produced from a batch can be sold as is for animal feed for $29 or processed further for $15 to make the cocktail of nutrients that are sold for $41. The depeeled spuds can be sold as is for $40 or processed further for $22 to make frozen french fries that are sold for $77. Required: a. Assuming that no other costs are involved in processing potatoes or in selling products, how much money does the company make from processing one batch of potatoes into the cocktail of organic nutrients and frozen french fries? Show your work! b. Should each of the intermediate products, peels and depeeled spuds, be sold as is or processed further into an end product? Explain.

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a. Analysis of the profitability of the overall operation: \(\begin{array}{lr} \text { Combined final sales value }(\$ 41+\$ 77) & & \$ 118 \\ \text { Less costs of producing the end products: } \\ \text { Cost of potatoes } & \$63\\ \text { Cost of peeling } & 12 \\ \text { Cost of further processing peels } & 15 \\ \text { Cost of further processing depeeled spuds } &22&112\\\text { Profit (loss) }&&\$6 \end{array}\) b. Analysis of sell or process further: 11eacbfc_c65a_1218_8ffe_d96ee1c041cc_TB7552_00 Frozen french fries should be produced, but not the cocktail of organic nutrients.

Question 3

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An automated turning machine is the current constraint at Jordison Corporation. Three products use this 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. (Round your intermediate calculations to 2 decimal places.)

It is profitable to continue processing joint products after the split-off point if their total revenues exceed the joint costs.

Kirsten Corporation makes 100,000 units per year of a part called a B345 gasket for use in one of its products. Data concerning the unit production costs of the B345 gasket follow: An outside supplier has offered to sell Kirsten Corporation all of the B345 gaskets it requires. If Kirsten Corporation decided to discontinue making the B345 gaskets, 25% of the above fixed manufacturing overhead costs could be avoided. Assume that direct labor is a variable cost. Required: a. Assume Kirsten Corporation has no alternative use for the facilities presently devoted to production of the B345 gaskets. If the outside supplier offers to sell the gaskets for $0.46 each, should Kirsten Corporation accept the offer? Fully support your answer with appropriate calculations. b. Assume that Kirsten Corporation could use the facilities presently devoted to production of the B345 gaskets to expand production of another product that would yield an additional contribution margin of $10,000 annually. What is the maximum price Kirsten Corporation should be willing to pay the outside supplier for B345 gaskets?

Saalfrank 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?

A cost that will be incurred regardless of which alternative is selected is not relevant when choosing between the alternatives.

The variable costs of a product are relevant in a decision concerning whether to eliminate the product.

The Wester Corporation produces three products with the following costs and selling prices: The company has insufficient capacity to fulfill all of the demand for these three products. If direct labor hours are the constraint, then the ranking of the products from the most profitable to the least profitable use of the constrained resource is:

An avoidable cost is a sunk cost that can be eliminated (in whole or in part) as a result of choosing one alternative over another.

Balser Corporation manufactures and sells a number of products, including a product called JYMP. Results for last year for the manufacture and sale of JYMPs are as follows: Balser is trying to decide whether to discontinue the manufacture and sale of JYMPs. 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 JYMP will have no effect on other products. The annual financial advantage (disadvantage) for the company of eliminating this product should be:

A study has been conducted to determine if Product A should be dropped. Sales of the product total $500,000; variable expenses total $340,000. Fixed expenses charged to the product total $210,000. The company estimates that $60,000 of these fixed expenses are not avoidable even if the product is dropped. If Product A is dropped, the annual financial advantage (disadvantage) for the company of eliminating this product should be:

Bruce 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 9,000 minutes are available per month on these machines. Direct labor is a variable cost in this company. Up to how much should the company be willing to pay for one additional minute of grinding machine time if the company has made the best use of the existing grinding machine capacity? (Round your intermediate calculations and final answer to 2 decimal places.)

Holton Company makes three products in a single facility. Data concerning these products follow: The mixing machines are potentially the constraint in the production facility. A total of 14,700 minutes are available per month on these machines. Direct labor is a variable cost in this company. Required: a. How many minutes of mixing machine time would be required to satisfy demand for all three products? b. How much of each product should be produced to maximize net operating income? (Round off to the nearest whole unit.) c. Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity? (Round off to the nearest whole cent.)

The management of Bonga Corporation is considering dropping product D74F. Data from the company's accounting system for this product for last year appear below: All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $111,000 of the fixed manufacturing expenses and $103,000 of the fixed selling and administrative expenses are avoidable if product D74F is discontinued. What would be the financial advantage (disadvantage) from dropping product D74F?

Glover Company makes three products in a single facility. These products have the following unit product costs: Additional data concerning these products are listed below. The mixing machines are potentially the constraint in the production facility. A total of 10,900 minutes are available per month on these machines. Direct labor is a variable cost in this company. Required: a. How many minutes of mixing machine time would be required to satisfy demand for all three products? b. How many units of each product should be produced to maximize net operating income? (Round off to the nearest whole unit.) c. Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity? (Round off to the nearest whole cent.)

The Tolar Corporation has 400 obsolete desk calculators that are carried in inventory at a total cost of $26,800. If these calculators are upgraded at a total cost of $10,000, they can be sold for a total of $30,000. As an alternative, the calculators can be sold in their present condition for $11,200. What is the financial advantage (disadvantage) to the company from upgrading the calculators?

The following are Silver Corporation's unit costs of making and selling an item at a volume of 8,000 units per month (which represents the company's capacity) : Present sales amount to 7,000 units per month. An order has been received from a customer in a foreign market for 1,000 units. The order would not affect regular sales. Total fixed costs, both manufacturing and selling and administrative, would not be affected by this order. The variable selling and administrative costs would have to be incurred for this special order as well as all other sales. Assume that direct labor is a variable cost. What is the financial advantage (disadvantage) for the company from this special order if it prices the 1,000 units at $20 per unit?

Elfalan 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 80,000 units per month is as follows: The normal selling price of the product is $67.80 per unit. An order has been received from an overseas customer for 3,000 units to be delivered this month at a special discounted price. This order would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.90 less per unit on this order than on normal sales. Direct labor is a variable cost in this company. Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 1,600 units for regular customers. The minimum acceptable price per unit for the special order is closest to: (Round your intermediate calculations to 2 decimal places.)

Costs that can be eliminated in whole or in part if a particular business segment is discontinued are called: