Differential Analysis: The Key to Decision Making

128. Costs associated with two alternatives, code-named Q and R, being considered by Corniel
Corporation are listed below:

Required:

a. Which costs are relevant and which are not relevant in the choice between these two
alternatives?
b. What is the differential cost between the two alternatives?

1
Learning Objective: 07-01 Identify relevant and irrelevant costs and benefits in a decision.
Level: 1 Easy

2
132. Mr. Earl Pearl, accountant for Margie Knall Co., Inc., has prepared the following product-line
income data:

The following additional information is available:

* The factory rent of $1,500 assigned to Product C is avoidable if the product were dropped.
* The company's total depreciation would not be affected by dropping C.
* Eliminating Product C will reduce the monthly utility bill from $1,500 to $800.
* All supervisors' salaries are avoidable.
* If Product C is discontinued, the maintenance department will be able to reduce monthly
expenses from $3,000 to $2,000.
* Elimination of Product C will make it possible to cut two persons from the administrative staff;
their combined salaries total $3,000.

Required:

Prepare an analysis showing whether Product C should be eliminated.

3
 Since there is a net $800 disadvantage to dropping Product C, it should not be dropped.

Learning Objective: 07-02 Prepare an analysis showing whether a product line or other business
segment should be added or dropped.
Level: 2 Medium

4
134. Bady Inc. makes a range of products. The company's predetermined overhead rate is $14 per
direct labor-hour, which was calculated using the following budgeted data:

Component M3 is used in one of the company's products. The unit cost of the component
according to the company's cost accounting system is determined as follows:

An outside supplier has offered to supply component M3 for $108 each. The outside supplier is
known for quality and reliability. Assume that direct labor is a variable cost, variable
manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing
overhead would not be affected by this decision. Bady chronically has idle capacity.

Required:

Is the offer from the outside supplier financially attractive? Why?

5
 Direct materials, direct labor, and variable manufacturing overhead are relevant in this decision.
Fixed manufacturing overhead is not relevant since it would not be affected by the decision. The
variable portion of the manufacturing overhead rate is computed as follows:

Variable portion of the predetermined overhead rate = Variable manufacturing overhead ÷

The direct-labor hours per unit for the special order can be determined as follows:

Consequently, the variable manufacturing overhead for the special order would be:

Putting this all together:

Because the outside supplier has offered to sell the component for $108.00 each, but it only
costs the company $95.20 to make the component internally, this is not a financially attractive
offer.

Learning Objective: 07-03 Prepare a make or buy analysis.

6
143. Humes Corporation makes a range of products. The company's predetermined overhead rate is
$16 per direct labor-hour, which was calculated using the following budgeted data:

Management is considering a special order for 700 units of product J45K at $64 each. The
normal selling price of product J45K is $75 and the unit product cost is determined as follows:

If the special order were accepted, normal sales of this and other products would not be
affected. The company has ample excess capacity to produce the additional units. Assume that
direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-
hours, and total fixed manufacturing overhead would not be affected by the special order.

Required:

If the special order were accepted, what would be the impact on the company's overall profit?

7
 Direct materials, direct labor, and variable manufacturing overhead are relevant in this decision.
Fixed manufacturing overhead is not relevant since it would not be affected by the decision. The
variable portion of the manufacturing overhead rate is computed as follows:

The direct-labor hours per unit for the special order can be determined as follows:

Consequently, the variable manufacturing overhead for the special order would be:

Putting this all together:

Learning Objective: 07-04 Prepare an analysis showing whether a special order should be accepted.
Level: 3 Hard
Source: CIMA, adapted

8
147. Redner, Inc. produces three products. Data concerning the selling prices and unit costs of the
three products appear below:

Fixed costs are applied to the products on the basis of direct labor hours.
Demand for the three products exceeds the company's productive capacity. The grinding
machine is the constraint, with only 2,400 minutes of grinding machine time available this week.

Required:

a. Given the grinding machine constraint, which product should be emphasized? Support your
answer with appropriate calculations.
b. Assuming that there is still unfilled demand for the product that the company should
emphasize in part (a) above, up to how much should the company be willing to pay for an
additional hour of grinding machine time?

9
 a. The product to emphasize can be determined by computing the contribution margin per unit
of the scarce resource, which in this case is grinding machine time.

Product L should be emphasized because it has the greatest contribution margin per unit of the
scarce resource.

b. If additional grinding machine time would be used to produce more of Product L, the time
would be worth 60 minutes per hour × $5 contribution margin per minute = $300 per hour.

Learning Objective: 07-05 Determine the most profitable use of a constrained resource.
Learning Objective: 07-06 Determine the value of obtaining more of the constrained resource.
Level: 3 Hard

10
154. Laukea Company makes two products from a common input. Joint processing costs up to the
split-off point total $49,600 a year. The company allocates these costs to the joint products on
the basis of their total sales values at the split-off point. Each product may be sold at the split-off
point or processed further. Data concerning these products appear below:

Required:

a. What is the net monetary advantage (disadvantage) of processing Product X beyond the
split-off point?
b. What is the net monetary advantage (disadvantage) of processing Product Y beyond the
split-off point?
c. What is the minimum amount the company should accept for Product X if it is to be sold at the
split-off point?
d. What is the minimum amount the company should accept for Product Y if it is to be sold at
the split-off point?

11
 a. & b.

c. & d.

Learning Objective: 07-07 Prepare an analysis showing whether joint products should be sold
at the split-off point or processed further.
Level: 3 Hard

12