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Exam 13: Differential Analysis: the Key to Decision Making

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Question 51

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Pascal Corporation manufactures numerous products, one of which is called Gamma66. The company has provided the following data about this product: Management is considering decreasing the price of Gamma66 by 4%, from $51.00 to $48.96. The company's marketing managers estimate that this price reduction would increase unit sales by 10%, from 100,000 units to 110,000 units. Assuming that the total traceable fixed expense does not change, what net operating income will product Gamma66 earn at a price of $48.96 if this sales forecast is correct?

A) $(74,000)
B) $1,645,600
C) $75,600
D) $1,496,000

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

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Question 52

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The opportunity cost of making a component part in a factory with excess capacity for which there is no alternative use is:

A) the variable manufacturing cost of the component.
B) the total manufacturing cost of the component.
C) the fixed manufacturing cost of the component.
D) zero.

E) C) and D)
F) B) and D)

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Question 53

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Ahrends Corporation makes 60,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: An outside supplier has offered to sell the company all of these parts it needs for $78.20 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $462,000 per year.If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $31.90 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.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 60,000 units required each year? (Round your intermediate calculations to 2 decimal places.)

Otool Incorporated is considering using stocks of an old raw material in a special project. The special project would require all 240 kilograms of the raw material that are in stock and that originally cost the company $2,112 in total. If the company were to buy new supplies of this raw material on the open market, it would cost $9.25 per kilogram. However, the company has no other use for this raw material and would sell it at the discounted price of $8.35 per kilogram if it were not used in the special project. The sale of the raw material would involve delivery to the purchaser at a total cost of $71 for all 240 kilograms. What is the relevant cost of the 240 kilograms of the raw material when deciding whether to proceed with the special project?

Ritner Corporation manufactures a product that has the following costs: The company uses the absorption costing approach to cost-plus pricing as described in the text. The pricing calculations are based on budgeted production and sales of 30,400 units per year.The company has invested $361,400 in this product and expects a return on investment of 9%.Required:a. Compute the markup on absorption cost. (Round your intermediate and final answer to 2 decimal places.)b. Compute the selling price of the product using the absorption costing approach. (Round your intermediate and final answer to 2 decimal places.)

Vannorman Corporation processes sugar beets in batches. A batch of sugar beets costs $78 to buy from farmers and $18 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 $25 or processed further for $16 to make the end product industrial fiber that is sold for $57. The beet juice can be sold as is for $39 or processed further for $22 to make the end product refined sugar that is sold for $84. How much profit (loss) does the company make by processing one batch of sugar beets into the end products industrial fiber and refined sugar rather than not processing that batch at all?

Swagger Corporation purchases potatoes from farmers. The potatoes are then peeled, producing two intermediate products-peels and depeeled spuds. The peels can then be processed further to make a cocktail of organic nutrients. And the depeeled spuds can be processed further to make frozen french fries. A batch of potatoes costs $63 to buy from farmers and $12 to peel in the company's plant. The peels produced from a batch can be sold as is for animal feed for $29 or processed further for $15 to make the cocktail of nutrients that are sold for $41. The depeeled spuds can be sold as is for $40 or processed further for $22 to make frozen french fries that are sold for $77.Required:a. Assuming that no other costs are involved in processing potatoes or in selling products, how much money does the company make from processing one batch of potatoes into the cocktail of organic nutrients and frozen french fries?b. Should each of the intermediate products, peels and depeeled spuds, be sold as is or processed further into an end product?

Paine Corporation processes sugar beets in batches that it purchases from farmers for $72 a batch. A batch of sugar beets costs $11 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 $16 to make the end product industrial fiber that is sold for $40. The beet juice can be sold as is for $43 or processed further for $28 to make the end product refined sugar that is sold for $100. Which of the intermediate products should be processed further?

The most recent monthly income statement for Benner Stores is given below: Due to its poor showing, consideration is being given to closing Store B. Studies show that if Store B is closed, one-fourth of its traceable fixed expenses will continue unchanged. The studies also show that closing Store B would result in a 10 percent decrease in sales in Store A. The company allocates common fixed expenses to the stores on the basis of sales dollars. Required: Determine the monthly financial advantage (disadvantage) of closing Store B.

If the formula for the markup percentage on absorption cost is used for setting prices, then the company's desired return on investment (ROI) will be attained regardless of how many units are actually sold.

The target costing approach was developed in recognition of two important characteristics of markets and costs. First, many companies have less control over price than they like to think. Second, most of a product's cost is determined when it is designed.

Ibsen Company makes two products from a common input. Joint processing costs up to the split-off point total $43,200 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 financial advantage (disadvantage) of processing Product X beyond the split-off point?b. What is financial 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?

The markup over cost under the absorption costing approach would decrease if the unit product cost increases, holding everything else constant.

Kopec Corporation manufactures numerous products, one of which is called Delta42. The company has provided the following data about this product: Assume that the total traceable fixed expense does not change. How many units of product Delta42 would Kopec need to sell at a price of $60.50 to earn the same net operating income that it currently earns at a price of $55.00? (Round your answer up to the nearest whole number.)

Algood Corporation manufactures numerous products, one of which is called Omicron09. The company has provided the following data about this product: Required:a. What net operating income is the company earning now on its sales of Omicron09? b. Management is considering decreasing the price of Omicron09 by 5%, from $19.00 to $18.05. The company's marketing managers estimate that this price reduction would increase unit sales by 15%, from 100,000 units to 115,000 units. Assuming that the total traceable fixed expense does not change, what net operating income will Omicron09 earn at a price of $18.05 if this sales forecast is correct? c. Assuming that the total traceable fixed expense does not change, how many units of Omicron09 would Algood need to sell at a price of $18.05 to earn the same net operating income that it currently earns at a price of $19.00? (Round your answer up to the nearest whole number.)

Spach Corporation manufactures numerous products, one of which is called Beta68. The company has provided the following data about this product: Management is considering decreasing the price of Beta68 by 5%, from $16.00 to $15.20. The company's marketing managers estimate that this price reduction would increase unit sales by 10%, from 110,000 units to 121,000 units. Assuming that the total traceable fixed expense does not change, what net operating income will product Beta68 earn at a price of $15.20 if this sales forecast is correct?

Maccarone Corporation manufactures numerous products, one of which is called Tau10. The company has provided the following data about this product: Required:a. What net operating income is the company earning now on its sales of Tau10? b. Management is considering decreasing the price of Tau10 by 5%, from $36.00 to $34.20. The company's marketing managers estimate that this price reduction would increase unit sales by 10%, from 130,000 units to 143,000 units. Assuming that the total traceable fixed expense does not change, what net operating income will Tau10 earn at a price of $34.20 if this sales forecast is correct? c. Assuming that the total traceable fixed expense does not change, if Maccarone decreases the price of Tau10 to $34.20, what percentage change in unit sales would provide the same net operating income that it currently earns at a price of $36.00? (Round your answer to the nearest one-tenth of a percent.)

Ecob Corporation uses the absorption costing approach to cost-plus pricing as described in the text to set prices for its products. Based on budgeted sales of 22,000 units next year, the unit product cost of a particular product is $60.80. The company's selling and administrative expenses for this product are budgeted to be $375,600 in total for the year. The company has invested $300,000 in this product and expects a return on investment of 9%.The markup on absorption cost for this product would be closest to: (Do not round intermediate calculations.)

Blauvelt Electronics Corporation has developed a new instrument-model GZ-29-that has been designed to outperform a competitor's best-selling instrument. Model GZ-29 has a useful life of 30,000 hours of service and its operating cost is $3.20 per hour.In contrast, the competitor's product has a useful life of 10,000 hours of service and has operating costs that average $5.60 per hour. The competitor's instrument sells for $149,000. Blauvelt has not yet established a selling price for model GZ-29.From a value-based pricing standpoint what range of possible prices should Blauvelt consider when setting a price for GZ-29?

Sardi Incorporated is considering whether to continue to make a component or to buy it from an outside supplier. The company uses 14,200 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, 30% is avoidable if the component were bought from the outside supplier. In addition, making the component uses 1 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 2 minutes on this machine and that has a contribution margin of $6.40 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? (Round your intermediate calculations to 2 decimal places.)