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Exam 11: Differential Analysis: The Key to Decision Making

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Question 41

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Part U67 is used in one of Broce Corporation's products.The company's Accounting Department reports the following costs of producing the 7,000 units of the part that are needed every year. An outside supplier has offered to make the part and sell it to the company for $21.40 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 $6,000 of these allocated general overhead costs would be avoided. Required: a.Prepare a report that shows the financial impact of buying part U67 from the supplier rather than continuing to make it inside the company. b.Which alternative should the company choose?

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_TB2627_00 b.The total cost of...

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Question 42

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Sardi Inc.is considering whether to continue to make a component or to buy it from an outside supplier.The company uses 17,000 of the components each year.The unit product cost of the component according to the company's cost accounting system is given as follows: Assume that direct labor is a variable cost.Of the fixed manufacturing overhead, 70% is avoidable if the component were bought from the outside supplier.In addition, making the component uses 2 minutes on the machine that is the company's current constraint.If the component were bought, time would be freed up for use on another product that requires 4 minutes on this machine and that has a contribution margin of $7.00 per unit. When deciding whether to make or buy the component, what cost of making the component should be compared to the price of buying the component?

A) $24.21 per unit
B) $25.50 per unit
C) $20.71 per unit
D) $22.00 per unit

E) All of the above
F) B) and D)

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Question 43

Multiple Choice

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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:

Payment of overtime to a worker in order to relax a production constraint could increase the profits of a company.

The Wyeth Corporation produces three products, A, B, and C, from a single raw material input.Product A can be sold at the splitoff point for $40,000, or it can be processed further at a total cost of $15,000 and then sold for $58,000.Joint costs total $60,000 annually.Product A should be:

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!

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:

How much of the unit product cost of $54.90 is relevant in the decision of whether to make or buy the part?

Wood Carving Corporation manufactures three products.Because of a recent lack of skilled wood carvers, the corporation has had a shortage of available labor hours.The following per unit data relates to the three products of the corporation: Assume that Wood Carving only has 1,800 labor hours available next month.Also assume that Wood Carving can only sell 800 units of each product in a given month.What is the maximum amount of contribution margin that Wood Carving can generate next month given this labor hour shortage?

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.

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

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:

Part U16 is used by Mcvean Corporation to make one of its products.A total of 13,000 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 the part and sell it to the company for $29.80 each.If this offer is accepted, the supervisor's salary and all of the variable costs, including the 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.In addition, the space used to make part U16 could be used to make more of one of the company's other products, generating an additional segment margin of $25,000 per year for that product.The annual financial advantage (disadvantage) for the company as a result of buying part U16 from the outside supplier should be:

A cost that can be avoided by choosing one alternative over another is relevant for decision purposes.

The company has received a special, one-time-only order for 400 units of component P06.There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order.Assuming that Younes has excess capacity and can fill the order without cutting back on the production of any product, what is the minimum price per unit below which the company should not accept the special order?

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?

Product U23N has been considered a drag on profits at Jinkerson Corporation for some time and management is considering discontinuing the product altogether.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 $144,000 of the fixed manufacturing expenses and $93,000 of the fixed selling and administrative expenses are avoidable if product U23N is discontinued.The financial advantage (disadvantage) for the company of eliminating this product for the upcoming year would be:

At what price per unit charged by the outside supplier would Melbourne be indifferent between making or buying the subcomponent?

A customer has requested that Lewelling Corporation fill a special order for 9,000 units of product S47 for $20.50 a unit.While the product would be modified slightly for the special order, product S47's normal unit product cost is $14.40: Assume that 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 modifications made to product S47 that would increase the variable costs by $5.00 per unit and that would require an investment of $36,000 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.The annual financial advantage (disadvantage) for the company as a result of accepting this special order should be:

If the special order from Woolgar Symphony Orchestra is accepted, the financial advantage (disadvantage) Bharu for the year should be: