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Exam 13: Differential Analysis: the Key to Decision Making

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Question 81

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The Freed Corporation produces three products, X, Y, Z, from a single raw material input. Product Y can be sold at the split-off point for total annual revenues of $50,000, or it can be processed further at a total annual cost of $16,000 and then sold for $68,000. Which of the following statements is true concerning Product Y?

A) Product Y should be sold at the split-off point rather than processed further.
B) The annual financial advantage from processing Product Y further is $18,000.
C) The annual financial advantage from processing Product Y further is $68,000.
D) The annual financial advantage from processing Product Y further is $2,000.

E) B) and C)
F) None of the above

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Question 82

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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 54,900 minutes are available per month on these machines.Direct labor is a variable cost in this company.How many minutes of grinding machine time would be required to satisfy demand for all four products?

A) 12,280
B) 42,690
C) 54,900
D) 57,120

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

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Question 83

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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 ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $60.60 per unit. The monthly financial advantage (disadvantage) for the company as a result of accepting this special order should be:

Wehrs Corporation has received a request for a special order of 9,800 units of product K19 for $47.30 each. The normal selling price of this product is $52.40 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 $7.00 per unit and that would require a one-time investment of $46,800 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.

Penagos Corporation is presently making part Z43 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 produce and sell the part to the company for $20.80 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 $4,000 of these allocated general overhead costs would be avoided.If management decides to buy part Z43 from the outside supplier rather than to continue making the part, what would be the annual financial advantage (disadvantage) ?

The Melville Corporation produces a single product called a Pong. Melville has the capacity to produce 60,000 Pongs each year. If Melville produces at capacity, the per unit costs to produce and sell one Pong are as follows: The regular selling price for one Pong is $80. A special order has been received by Melville from Mowen Corporation to purchase 6,000 Pongs next year. If this special order is accepted, the variable selling expense will be reduced by 75%. However, Melville will have to purchase a specialized machine to engrave the Mowen name on each Pong in the special order. This machine will cost $9,000 and it will have no use after the special order is filled. The total fixed manufacturing overhead and selling expenses would be unaffected by this special order. Assume that direct labor is a variable cost.Assume Melville anticipates selling only 50,000 units of Pong to regular customers next year. If Mowen Corporation offers to buy the special order units at $65 per unit, the annual financial advantage (disadvantage) for the company as a result of accepting this special order should be:

The Bharu Violin Corporation has the capacity to manufacture and sell 5,000 violins each year but is currently only manufacturing and selling 4,800. The following data relate to annual operations at 4,800 units: Woolgar Symphony Orchestra is interested in purchasing Bharu's excess capacity of 200 units but only if they can get the violins for $350 each. This special order would not affect regular sales or the total fixed costs.If the special order from Woolgar Symphony Orchestra is accepted, the financial advantage (disadvantage) Bharu for the year should be:

Herrell Corporation manufactures numerous products, one of which is called Delta-11. The company has provided the following data about this product: Assume that the total traceable fixed expense does not change. If Herrell increases the price of Delta-11 to $30.45, what percentage change in unit sales would provide the same net operating income as is currently being earned at a price of $29.00? (Your answer should be rounded to the nearest 0.1%.)

Elly Industries is a multi-product company that currently manufactures 30,000 units of part MR24 each month for use in production of its products. The facilities now being used to produce part MR24 have a fixed monthly cost of $150,000 and a capacity to produce 35,000 units per month. If Elly were to buy part MR24 from an outside supplier, the facilities would be idle, but its fixed costs would continue at 40% of their present amount. The variable production costs of Part MR24 are $11 per unit.If Elly industries is able to obtain part MR24 from an outside supplier at a purchase price of $10 per unit, the monthly financial advantage (disadvantage) of buying the part rather than making it would be:

The absorption costing approach to cost-plus pricing will result in attaining the company's required rate of return only if forecasted unit sales are realized.

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:

Ahrends Corporation makes 70,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: An outside supplier has offered to sell the company all of these parts it needs for $48.50 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $273,000 per year.If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $8.20 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.What is the financial advantage (disadvantage) of purchasing the part rather than making it? (Round your intermediate calculations to 2 decimal places.)

Winder 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 3,000 units of component QEA. Each unit of QEA requires 5 units of material F85 and 5 units of material E71. Data concerning these two materials follow: Material F85 is in use in many of the company's products and is routinely replenished. Material E71 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 QEA?

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.)

Ahrends Corporation makes 70,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: An outside supplier has offered to sell the company all of these parts it needs for $48.50 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $273,000 per year.If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $8.20 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.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 70,000 units required each year? (Round your intermediate calculations to 2 decimal places.)

Reppond Corporation manufactures numerous products, one of which is called Gamma38. The company has provided the following data about this product: Assume that the total traceable fixed expense does not change. How many units of product Gamma38 would Reppond need to sell at a price of $94.05 to earn the same net operating income that it currently earns at a price of $99.00? (Round your answer up to the nearest whole number.)

Spach Corporation manufactures numerous products, one of which is called Beta-68. The company has provided the following data about this product: Assume that the total traceable fixed expense does not change. How many units of product Beta-68 would Spach need to sell at a price of $15.20 to earn the same net operating income that it currently earns at a price of $16.00? (Round your answer up to the nearest whole number.)

Chruch Corporation manufactures numerous products, one of which is called Tau-42. The company has provided the following data about this product: Management is considering decreasing the price of Tau-42 by 6%, from $64.00 to $60.16. The company's marketing managers estimate that this price reduction would increase unit sales by 10%, from 60,000 units to 66,000 units. Assuming that the total traceable fixed expense does not change, what net operating income will product Tau-42 earn at a price of $60.16 if this sales forecast is correct?

Chruch Corporation manufactures numerous products, one of which is called Tau-42. The company has provided the following data about this product: Management is considering decreasing the price of Tau-42 by 8%, from $67.00 to $61.64. The company's marketing managers estimate that this price reduction would increase unit sales by 10%, from 52,000 units to 57,200 units. Assuming that the total traceable fixed expense does not change, what net operating income (loss) will product Tau-42 earn at a price of $61.64 if this sales forecast is correct?

Gama Avionics Corporation has developed a new high pressure pump-model SF-22-that has been designed to outperform a competitor's best-selling high pressure pump. The competitor's product has a useful life of 30,000 hours of service, has operating costs that average $1.70 per hour, and sells for $109,000. In contrast, model SF-22 has a useful life of 60,000 hours of service and its operating cost is $1.10 per hour. Gama has not yet established a selling price for model SF-22.Required:From a value-based pricing standpoint what is model SF-22's economic value to the customer over its 60,000 hour useful life?