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Exam 11: Differential Analysis: The Key to Decision Making

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Question 41

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Northern Stores is a retailer in the upper Midwest.The most recent monthly income statement for Northern Stores is given below: Northern is considering closing Store I.If Store I is closed,one-fourth of its traceable fixed expenses would continue.Also,the closing of Store I would result in a 20% decrease in sales in Store II.Northern allocates common fixed expenses on the basis of sales dollars and none of these costs would be saved if a store were shut down. Required: Compute the overall increase or decrease in the net operating income of Northern Stores if Store I is closed.

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Question 42

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Gierlach Beet Processors,Inc. ,processes sugar beets in batches.A batch of sugar beets costs $27 to buy from farmers and $17 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 $27 or processed further for $14 to make the end product industrial fiber that is sold for $34.The beet juice can be sold as is for $32 or processed further for $29 to make the end product refined sugar that is sold for $58.How much more profit (loss) does the company make by processing the intermediate product beet juice into refined sugar rather than selling it as is?

A) $(47)
B) $(20)
C) $(3)
D) $(25)

E) B) and C)
F) None of the above

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Question 43

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In a make-or-buy decision,relevant costs include:

Defective units should be detected and scrapped or reworked before the bottleneck operation rather than after it.

One way to increase the effective utilization of a bottleneck is to put less emphasis on preventing defects and simply discard defective units at final inspection before sending them to customers.

Yehle Inc.regularly uses material Y51B and currently has in stock 460 liters of the material for which it paid $2,530 several weeks ago.If this were to be sold as is on the open market as surplus material,it would fetch $4.55 per liter.New stocks of the material can be purchased on the open market for $5.45 per liter,but it must be purchased in lots of 1,000 liters.You have been asked to determine the relevant cost of 720 liters of the material to be used in a job for a customer.The relevant cost of the 720 liters of material Y51B is:

An avoidable cost is a cost that can be completely eliminated irrespective of whether one chooses one alternative or another in a decision.

Pilgrim Corporation makes a range of products.The company's predetermined overhead rate is $23 per direct labor-hour,which was calculated using the following budgeted data: Management is considering a special order for 800 units of product N89E at $69 each.The normal selling price of product N89E is $88 and the unit product cost is determined as follows: C:\Users\user\Dropbox\Quizplus Parsing Documents\To Be Parsed\Done Farah\TB2461,Introduction to Managerial Accounting 6th Edition by Eric Noreen\Brewer_7e_PrintFile_TestBank_File\Brewer_7e_PrintFile_TestBank_File\Images\7e_BGN_CH10_TB_edit 02172015_218.png 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?

A cost that can be avoided by choosing one alternative over another is not relevant for decision purposes.

Farnsworth Television makes and sells portable television sets.Each television regularly sells for $200.The following cost data per television are based on a full capacity of 12,000 televisions produced each period: A special order has been received by Farnsworth for a sale of 2,500 televisions to an overseas customer.The only selling costs that would be incurred on this order would be $10 per television for shipping.Farnsworth is now selling 7,200 televisions through regular distributors each period.What should be the minimum selling price per television in negotiating a price for this special order?

Vanikord Corporation currently has two divisions which had the following operating results for last year: Because the Rubber Division sustained a loss,the president of Vanikoro 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,how much higher or lower would Vanikoro's total net operating income have been for the year?

Glocker 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 5,900 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 much 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. )

A cost that is relevant in one decision may not be relevant in another decision.

Wiacek Corporation has received a request for a special order of 4,000 units of product F65 for $26.60 each.Product F65's unit product cost is $25.80,determined 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 modifications made to product F65 that would increase the variable costs by $3.00 per unit and that would require an investment of $23,000 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.If the special order is accepted,the company's overall net operating income would increase (decrease) by:

Teich Inc.is considering whether to continue to make a component or to buy it from an outside supplier.The company uses 15,000 of the components each year.The unit product cost of the component according to the company's absorption cost accounting system is given as follows: Assume that direct labor is a variable cost.Of the fixed manufacturing overhead,10% is avoidable if the component were bought from the outside supplier;the remainder is not avoidable.In addition,making the component uses 3 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 6 minutes on this machine and that has a contribution margin of $8.10 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?

Opportunity costs are:

Costabile Corporation is considering dropping product G41O.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 $117,000 of the fixed manufacturing expenses and $46,000 of the fixed selling and administrative expenses are avoidable if product G41O is discontinued. Required: a.According to the company's accounting system,what is the net operating income earned by product G41O? Show your work! b.What would be the effect on the company's overall net operating income of dropping product G41O? Should the product be dropped? Show your work!

Which of the following is not an effective way of dealing with a production constraint (i.e. ,bottleneck) ?

The constraint at Fulena Inc.is an expensive milling machine.The three products listed below use this constrained resource. Required: a.Rank the products in order of their current profitability from the most profitable to the least profitable.In other words,rank the products in the order in which they should be emphasized.Show your work! b.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?

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