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Exam 11: Differential Analysis: The Key to Decision Making

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Question 101

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A disadvantage of vertical integration is that by pooling demand for parts from a number of companies, a supplier may be able to enjoy economies of scale that result in higher quality and lower cost than if every company makes its own parts.

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B) False

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Question 102

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A customer has asked Lalka Corporation to supply 3,000 units of product H60, with some modifications, for $34.70 each.The normal selling price of this product is $46.35 each.The normal unit product cost of product H60 is computed as follows: 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 some modifications made to product H60 that would increase the variable costs by $3.80 per unit and that would require a one-time investment of $24,000 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. Required: Determine the financial advantage or disadvantage of accepting the special order.Show your work!

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Question 103

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The SP Corporation makes 40,000 motors to be used in the production of its sewing machines.The average cost per motor at this level of activity is: An outside supplier recently began producing a comparable motor that could be used in the sewing machine.The price offered to SP Corporation for this motor is $18.If SP Corporation decides not to make the motors, there would be no other use for the production facilities and none of the fixed manufacturing overhead cost could be avoided.Direct labor is a variable cost in this company.The annual financial advantage (disadvantage) for the company as a result of making the motors rather than buying them from the outside supplier would be:

McGraw Company uses 5,000 units of Part X each year as a component in the assembly of one of its products.The company is presently producing Part X internally at a total cost of $100,000, computed as follows: An outside supplier has offered to provide Part X at a price of $18 per unit.If McGraw Company stops producing the part internally, one-third of the fixed manufacturing overhead would be eliminated.Assume that direct labor is a variable cost. Required: Prepare an analysis showing the annual financial advantage or disadvantage of accepting the outside supplier's offer.

Two or more products that are produced from a common input are known as joint products.

The company has received a special, one-time-only order for 500 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.However, assume that Younes has no excess capacity and this special order would require 30 minutes of the constraining resource, which could be used instead to produce products with a total contribution margin of $10,000.What is the minimum price per unit below which the company should not accept the special order?

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 study has been conducted to determine if Product A should be dropped.Sales of the product total $500,000; variable expenses total $340,000.Fixed expenses charged to the product total $210,000.The company estimates that $60,000 of these fixed expenses are not avoidable even if the product is dropped.If Product A is dropped, the annual financial advantage (disadvantage) for the company of eliminating this product should be:

Gallerani Corporation has received a request for a special order of 6,000 units of product A90 for $21.20 each.Product A90's unit product cost is $16.20, determined as follows: 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 A90 that would increase the variable costs by $4.20 per unit and that would require an investment of $21,000 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:

Vanik Corporation currently has two divisions which had the following operating results for last year: Because the Rubber Division sustained a loss, the president of Vanik is considering the elimination of this division.All of the division's traceable fixed costs could be avoided if the division was dropped.None of the allocated common corporate fixed costs could be avoided.If the Rubber Division was dropped at the beginning of last year, the financial advantage (disadvantage) to the company for the year would have been:

If product B is processed beyond the split-off point, the financial advantage (disadvantage) as compared to selling B at the split-off point would be:

WP Corporation produces products X, Y, and Z from a single raw material input in a joint production process.Budgeted data for the next month is as follows: The cost of the joint raw material input is $149,000.Which of the products should be processed beyond the split-off point?

A complete income statement need not be prepared as part of a differential cost analysis.

In a decision to drop a product, the product should be charged for rent in proportion to the space it occupies even if the space has no alternative use and the rental payment is unavoidable.

Garson, 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 milling machine is the constraint, with only 2,400 minutes of milling machine time available this week. Required: a.Given the milling 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 milling machine time?

Which of the following costs are always irrelevant in decision making?

If Melbourne decides to purchase the subcomponent from the outside supplier, the annual financial advantage (disadvantage) would be:

Consider the following production and cost data for two products, L and C: A total of 60,000 machine minutes are available each period and there is unlimited demand for each product.What is the largest possible total contribution margin that can be realized each period?

In a decision between selling B at the split-off point or processing B further, which of the following items is not relevant:

Gordon Corporation produces 1,000 units of a part per year which are used in the assembly of one of its products.The unit cost of producing these parts is: The part can be purchased from an outside supplier at $20 per unit.If the part is purchased from the outside supplier, two thirds of the total fixed costs incurred in producing the part can be avoided.The annual financial advantage (disadvantage) for the company as a result of buying the part from the outside supplier would be: