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Exam 11: Differential Analysis: The Key to Decision Making

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Question 1

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Marley Corporation makes three products (X, Y, & Z) with the following characteristics: The company has a capacity of 2,000 machine hours, but there is virtually unlimited demand for each product.In order to maximize total contribution margin, how many units of each product should the company produce?

A) 2,000 units of X, 500 units of Y, and 200 units of Z
B) 0 units of X, 0 units of Y, and 200 units of Z
C) 0 units of X, 500 units of Y, and 0 units of Z
D) 1,000 units of X, 0 units of Y, and 0 units of Z

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

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Question 2

Multiple Choice

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Stinehelfer Beet Processors, Inc., processes sugar beets in batches.A batch of sugar beets costs $56 to buy from farmers and $13 to crush in the company's plant.Two intermediate products, beet fiber and beet juice, emerge from the crushing process.The beet fiber can be sold as is for $24 or processed further for $12 to make the end product industrial fiber that is sold for $31.The beet juice can be sold as is for $43 or processed further for $29 to make the end product refined sugar that is sold for $91.What is the financial advantage (disadvantage) for the company from processing the intermediate product beet juice into refined sugar rather than selling it as is?

A) $19
B) $6
C) $(50)
D) $(16)

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

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Question 3

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Consistency demands that a cost that is relevant in one decision be regarded as relevant in other decisions as well.

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?

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?

Supler Corporation produces a part used in the manufacture of one of its products.The unit product cost is $18, computed as follows: An outside supplier has offered to provide the annual requirement of 4,000 of the parts for only $14 each.The company estimates that 60% of the fixed manufacturing overhead cost above could be eliminated if the parts are purchased from the outside supplier.Assume that direct labor is an avoidable cost in this decision.Based on these data, the financial advantage (disadvantage) of purchasing the parts from the outside supplier would be:

In a sell or process further decision, consider the following costs: I.A variable production cost incurred prior to split-off. II.A variable production cost incurred after split-off. III.An avoidable fixed production cost incurred after split-off. Which of the above costs is (are) not relevant in a decision regarding whether the product should be processed further?

What is the contribution margin per unit on normal sales?

Are the materials costs and processing costs relevant in the choice between alternatives A and B?

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.)

Are the materials costs and processing costs relevant in the choice between alternatives X and Y?

The opportunity cost of making a component part in a factory with excess capacity for which there is no alternative use is:

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

At what selling price would the new product be just breaking even?

Rebelo Corporation is presently making part E07 that is used in one of its products.A total of 17,000 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 make 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, none of which would be avoided if the part were purchased instead of produced internally.If management decides to buy part E07 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 Bharu is manufacturing and selling at capacity (5,000 units) .Any special order will mean a loss of regular sales.Under these conditions if the special order from Woolgar Symphony Orchestra is accepted, the financial advantage (disadvantage) Bharu for the year should be:

Fixed costs are irrelevant in decisions about whether a product should be dropped.

If Elly Industries continues to use 30,000 units of part MR24 each month, it would realize a financial advantage by purchasing this part from an outside supplier only if the supplier's unit price is less than:

Refer to the original data in the problem.What is the current contribution margin per unit for component P06 based on its selling price of $220 and its annual production of 4,000 units?

It may be a good decision to replace an asset before its original cost has been fully recovered through increased revenues or decreased costs.