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Exam 12: Differential Analysis: The Key to Decision Making

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Question 71

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Priddy Corporation processes sugar cane in batches.The company purchases a batch of sugar cane for $62 from farmers and then crushes the cane in the company's plant at the cost of $18.Two intermediate products,cane fiber and cane juice,emerge from the crushing process.The cane fiber can be sold as is for $28 or processed further for $13 to make the end product industrial fiber that is sold for $36.The cane juice can be sold as is for $43 or processed further for $23 to make the end product molasses that is sold for $85.Which of the intermediate products should be processed further?

A) Cane fiber should NOT be processed into industrial fiber; Cane juice should be processed into molasses
B) Cane fiber should be processed into industrial fiber; Cane juice should NOT be processed into molasses
C) Cane fiber should be processed into industrial fiber; Cane juice should be processed into molasses
D) Cane fiber should NOT be processed into industrial fiber; Cane juice should NOT be processed into molasses

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Question 72

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The management of Wengel Corporation is considering dropping product B90D.Data from the company's accounting system appear below: All fixed expenses of the company are fully allocated to products in the company's accounting system.Further investigation has revealed that $173,000 of the fixed manufacturing expenses and $150,000 of the fixed selling and administrative expenses are avoidable if product B90D is discontinued. Required: What would be the financial advantage (disadvantage)of dropping B90D? Should the product be dropped? Show your work!

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Net operating income would de...

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Question 73

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Future costs that do not differ between the alternatives in a decision are avoidable costs.

Which of the following would be relevant in the decision to sell or throw out obsolete inventory?

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?

When a company is involved in more than one activity in the entire value chain,it is vertically integrated.

A product whose revenues do not cover its variable costs and its traceable fixed costs should usually be dropped.

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 9,800 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 off to the nearest whole cent.)

Part S51 is used in one of Haberkorn Corporation's products.The company makes 12,000 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 $37.70 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 $17,000 of these allocated general overhead costs would be avoided. The annual financial advantage (disadvantage) for the company as a result of buying the part from the outside supplier would be:

Cranston Corporation makes four products in a single facility. Data concerning these products appear below: The milling machines are potentially the constraint in the production facility. A total of 28,200 minutes are available per month on these machines. -How many minutes of milling machine time would be required to satisfy demand for all four products?

Product X-547 is one of the joint products in a joint manufacturing process.Management is considering whether to sell X-547 at the split-off point or to process X-547 further into Xylene.The following data have been gathered: I.Selling price of X-547 II.Variable cost of processing X-547 into Xylene. III.The avoidable fixed costs of processing X-547 into Xylene. IV.The selling price of Xylene. V.The joint cost of the process from which X-547 is produced. Which of the above items are relevant in a decision of whether to sell the X-547 as is or process it further into Xylene?

The term joint cost is used to describe the costs incurred up to the split-off point in a process involving joint products.

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 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.)

Janeiro Skate,Inc.currently manufactures the wheels that it uses for its in-line skates.The annual costs to manufacture the 150,000 wheels needed each year are as follows: Kasba Rubber Company has offered to provide Janeiro with all of its annual wheel needs for $3.50 per wheel.If Janeiro accepts this offer,75% of the fixed manufacturing overhead above could be totally eliminated.Also,Janeiro would be able to rent out the freed up space and could generate $72,000 of income annually.Assume that direct labor is a variable cost. Required: Based on this information,would Janeiro be financially better off to continue making the wheels or to buy them from Kasba?

Benjamin Company produces products C,J,and R from a joint production process.Each product may be sold at the split-off point or processed further.Joint production costs of $95,000 per year are allocated to the products based on the relative number of units produced.Data for Benjamin's operations for last year follow: Required: Which products should be processed beyond the split-off point?

Cranston Corporation makes four products in a single facility. Data concerning these products appear below: The milling machines are potentially the constraint in the production facility. A total of 28,200 minutes are available per month on these machines. -Up to how much should the company be willing to pay for one additional minute of milling machine time if the company has made the best use of the existing milling machine capacity? (Round off to the nearest whole cent.)

Ouzts Corporation is considering Alternative A and Alternative B. Costs associated with the alternatives are listed below: -Are the materials costs and processing costs relevant in the choice between alternatives A and B?

One of the employees of Davenport Corporation recently was involved in an accident with one of the corporation's delivery vans.The corporation is either going to repair the damaged van or sell it as is and buy a comparable used van.Information related to this decision is provided below: Based on the information above,Davenport would be financially better off:

Schickel Inc.regularly uses material B39U and currently has in stock 460 liters of the material for which it paid $3,128 several weeks ago.If this were to be sold as is on the open market as surplus material,it would fetch $5.95 per liter.New stocks of the material can be purchased on the open market for $6.45 per liter,but it must be purchased in lots of 1,000 liters.You have been asked to determine the relevant cost of 760 liters of the material to be used in a job for a customer.The relevant cost of the 760 liters of material B39U is:

Variable costs are always relevant costs in decisions.