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Exam 11: Differential Analysis: The Key to Decision Making

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Question 71

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In addition to the facts given above, assume that the space used to produce part U98 could be used to make more of one of the company's other products, generating an additional segment margin of $24,000 per year for that product.What would be the financial advantage (disadvantage) of buying part U98 from the outside supplier and using the freed space to make more of the other product?

A) ($6,800)
B) ($1,200)
C) $24,000
D) ($49,200)

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Question 72

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Banfield Corporation makes three products that use compound W, the current constrained resource.Data concerning those products appear below: 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.

A) WX, VP, YI
B) YI, VP, WX
C) WX, YI, VP
D) VP, WX, YI

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Question 73

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Farrugia Corporation produces two intermediate products, A and B, from a common input.Intermediate product A can be further processed into Product X.Intermediate product B can be further processed into Product Y.The common input is purchased in batches that cost $36 each and the cost of processing a batch to produce intermediate products A and B is $15.Intermediate product A can be sold as is for $21 or processed further for $14 to make Product X that is sold for $32.Intermediate product B can be sold as is for $44 or processed further for $28 to make Product Y that is sold for $64. Required: a.Assuming that no other costs are involved in processing the common input or in selling products, what is the profit (loss)from processing one batch of the common input into the products X and Y? Show your work! b.Should each of the intermediate products, A and B, be sold as is or processed further? Explain.

Which of the intermediate products should be processed further?

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

Recher Corporation uses part Q89 in one of its products.The company's Accounting Department reports the following costs of producing the 8,000 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 $27.60 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 $3,000 of these allocated general overhead costs would be avoided.In addition, the space used to produce part Q89 could be used to make more of one of the company's other products, generating an additional segment margin of $16,000 per year for that product. Required: a.Prepare a report that shows the financial impact of buying part Q89 from the supplier rather than continuing to make it inside the company. b.Which alternative should the company choose?

Assume that sufficient time is available on the constrained machine 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 this constrained resource?

A cost that will be incurred regardless of which alternative is selected is not relevant when choosing between the alternatives.

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?

CoolAir Corporation manufactures portable window air conditioners.CoolAir has the capacity to manufacture and sell 80,000 air conditioners each year but is currently only manufacturing and selling 60,000.The following per unit numbers relate to annual operations at 60,000 units: The City of Clearwater would like to purchase 3,000 air conditioners from CoolAir but only if they can get them for $75 each.Variable selling and administrative costs on this special order will drop down to $2 per unit.This special order will not affect the 60,000 regular sales and it will not affect the total fixed costs.The annual financial advantage (disadvantage) for the company as a result of accepting this special order from the City of Clearwater should be:

Avoidable costs are irrelevant costs in decisions.

A cost that is assigned to a product using activity-based costing may or may not be a relevant cost in a decision involving that product.

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 many units 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.)

Munafo 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 6,500 units of component VGI.Each unit of VGI requires 1 unit of material I57 and 5 units of material M97.Data concerning these two materials follow: Material I57 is in use in many of the company's products and is routinely replenished.Material M97 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 VGI?

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:

How many minutes of milling machine time would be required to satisfy demand for all four products?

It is profitable to continue processing joint products after the split-off point if their total revenues exceed the joint costs.

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

Landor Appliance Corporation makes and sells electric fans.Each fan regularly sells for $42.The following cost data per fan is based on a full capacity of 150,000 fans produced each period. A special order has been received by Landor for a sale of 25,000 fans to an overseas customer.The only selling costs that would be incurred on this order would be $4 per fan for shipping.Landor is now selling 120,000 fans through regular channels each period.Assume that direct labor is an avoidable cost in this decision.What should Landor use as a minimum selling price per fan in negotiating a price for this special order?

Drew Cane Products, Inc., processes sugar cane in batches.The company buys a batch of sugar cane from farmers for $90 which is then crushed in the company's plant at a cost of $11.Two intermediate products, cane fiber and cane juice, emerge from the crushing process.The cane fiber can be sold as is for $21 or processed further for $13 to make the end product industrial fiber that is sold for $45.The cane juice can be sold as is for $41 or processed further for $29 to make the end product molasses that is sold for $103.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?