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Exam 11: Differential Analysis: The Key to Decision Making

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Question 51

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The Anaconda Mining Company currently is operating at less than 50 percent of practical capacity.The management of the company expects sales to drop below the present level of 15,000 tons of ore per month very soon.The selling price per ton of ore is $2 and the variable cost per ton is $1.Fixed costs per month total $15,000. Management is concerned that a further drop in sales volume will generate a loss and, accordingly, is considering the temporary suspension of operations until demand in the metals markets returns to normal levels and prices rebound.Management has implemented a cost reduction program over the past year that has been successful in reducing costs.Nevertheless, suspension of operations appears to be the only viable alternative.Management estimates that suspension of operations would reduce fixed costs from $15,000 to $5,000 per month. Required: a.Why does management estimate that fixed costs will persist at $5,000 per month even though the mine is temporarily closed? b.At what sales volume should management suspend operations at the mine?

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a.Some costs will continue despite the t...

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Question 52

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What is the financial advantage (disadvantage) for the company from processing the intermediate product cane juice into molasses rather than selling it as is?

A) ($74) per batch
B) ($14) per batch
C) ($1) per batch
D) ($38) per batch

E) B) and D)
F) B) and C)

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Question 53

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Hamby Corporation is preparing a bid for a special order that would require 780 liters of material W34C.The company already has 640 liters of this raw material in stock that originally cost $8.30 per liter.Material W34C is used in the company's main product and is replenished on a periodic basis.The resale value of the existing stock of the material is $7.60 per liter.New stocks of the material can be readily purchased for $8.35 per liter.What is the relevant cost of the 780 liters of the raw material when deciding how much to bid on the special order?

The most recent monthly income statement for Benner Stores is given below: Due to its poor showing, consideration is being given to closing Store B.Studies show that if Store B is closed, one-fourth of its traceable fixed expenses will continue unchanged.The studies also show that closing Store B would result in a 10 percent decrease in sales in Store A.The company allocates common fixed expenses to the stores on the basis of sales dollars. Required: Determine the monthly financial advantage (disadvantage)of closing Store B.

What is the financial advantage (disadvantage) for the company from processing one batch of sugar cane into the end products industrial fiber and molasses rather than not processing that batch at all?

Zouar Computer Corporation currently manufactures the disk drives that it uses in its computers.The costs to produce 5,000 of these disk drives last year were as follows: Kidal Electronics has offered to provide Zouar with all of its disk drive needs for $27 per drive.If Zouar accepts this offer, Zouar will be able to use the freed up space to generate an additional $40,000 of income each year to produce more of its computer keyboards.Only $3 per drive of the fixed manufacturing overhead cost above could be avoided.Direct labor is an avoidable cost in this decision.Based on this information, would Zouar be financially better off making the drives or buying the drives and by how much?

The management of Furrow Corporation is considering dropping product L07E.Data from the company's budget for the upcoming year appear below: In the company's accounting system all fixed expenses of the company are fully allocated to products.Further investigation has revealed that $186,000 of the fixed manufacturing expenses and $106,000 of the fixed selling and administrative expenses are avoidable if product L07E is discontinued.The financial advantage (disadvantage) for the company of eliminating this product for the upcoming year would be:

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

The Jabba Corporation manufactures the "Snack Buster" which consists of a wooden snack chip bowl with an attached porcelain dip bowl.Which of the following would be relevant in Jabba's decision to make the dip bowls or buy them from an outside supplier?

Brissett Corporation makes three products that use the current constraint, which is a particular type of machine.Data concerning those products appear below: 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?

Ibsen Company makes two products from a common input.Joint processing costs up to the split-off point total $43,200 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: Required: a.What is financial advantage (disadvantage)of processing Product X beyond the split-off point? b.What is financial advantage (disadvantage)of processing Product Y beyond the split-off point? c.What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point? d.What is the minimum amount the company should accept for Product Y if it is to be sold at the split-off point?

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

What is the financial advantage (disadvantage) for the company of processing Product X beyond the split-off point?

Sharp Corporation produces 8,000 parts each year, which are used in the production of one of its products.The unit product cost of a part is $36, computed as follows: The parts can be purchased from an outside supplier for only $28 each.The space in which the parts are now produced would be idle and fixed production costs would be reduced by one-fourth.Based on these data, the financial advantage (disadvantage) of purchasing the parts from the outside supplier would be:

Kahn Corporation (a multi-product company) produces and sells 8,000 units of Product X each year.Each unit of Product X sells for $10 and has a contribution margin of $6.If Product X is discontinued, $50,000 of the $60,000 in annual fixed costs charged to Product X could be eliminated.The annual financial advantage (disadvantage) for the company of eliminating this product should be:

Wehrs Corporation has received a request for a special order of 6,000 units of product K19 for $32.30 each.The normal selling price of this product is $33.45 each, but the units would need to be modified slightly for the customer.The normal unit product cost of product K19 is computed as follows: 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 some modifications made to product K19 that would increase the variable costs by $4.90 per unit and that would require a one-time investment of $23,000 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. Required: Determine the effect on the company's total net operating income of accepting the special order.Show your work!

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 off to the nearest whole cent.)

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

Assume Melville anticipates selling only 50,000 units of Pong to regular customers next year.At what selling price for the 6,000 special order units would Melville be financially indifferent between accepting or rejecting the special order from Mowen?

Assume that dropping Product JYMP would result in a $90,000 increase in the contribution margin of other products.If Balser chooses to discontinue JYMP, the annual financial advantage (disadvantage) of eliminating this product should be: