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Exam 11: Differential Analysis: The Key to Decision Making

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Question 31

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Holden Corporation produces three products, with costs and selling prices as follows: A particular machine is the bottleneck.On that machine, 3 machine hours are required to produce each unit of Product A, 1 hour is required to produce each unit of Product B, and 2 hours are required to produce each unit of Product C.Rank the products from the most profitable to the least profitable use of the constrained resource (bottleneck) .

A) C, A, B
B) A, C, B
C) B, C, A
D) B, A, C

E) A) and D)
F) A) and C)

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Question 32

Multiple Choice

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Assume the company has 50 units left over from last year which have small defects and which will have to be sold at a reduced price for scrap.The sale of these defective units will have no effect on the company's other sales.Which of the following costs is relevant in this decision?

A) $11 variable manufacturing cost
B) $19 unit product cost
C) $1 variable selling and administrative cost
D) $26 full cost

E) A) and B)
F) A) and C)

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Question 33

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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?

Milford Corporation has in stock 16,100 kilograms of material R that it bought five years ago for $5.75 per kilogram.This raw material was purchased to use in a product line that has been discontinued.Material R can be sold as is for scrap for $3.91 per kilogram.An alternative would be to use material R in one of the company's current products, S88Y, which currently requires 2 kilograms of a raw material that is available for $7.60 per kilogram.Material R can be modified at a cost of $0.77 per kilogram so that it can be used as a substitute for this material in the production of product S88Y.However, after modification, 4 kilograms of material R is required for every unit of product S88Y that is produced.Milford Corporation has now received a request from a company that could use material R in its production process.Assuming that Milford Corporation could use all of its stock of material R to make product S88Y or the company could sell all of its stock of the material at the current scrap price of $3.91 per kilogram, what is the minimum acceptable selling price of material R to the company that could use material R in its own production process?

Faustina Chemical Corporation manufactures three chemicals (TX14, NJ35, and KS63) from a joint process.The three chemicals are in industrial grade form at the split-off point.They can either be sold at that point or processed further into premium grade.Costs related to each batch of this chemical process is as follows: For which product(s) above would it be more profitable for Faustina to sell at the split-off point rather than process further?

A joint product is:

What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point?

Gottshall Inc.makes a range of products.The company's predetermined overhead rate is $19 per direct labor-hour, which was calculated using the following budgeted data: Component P0 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 P0 for $78 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.Gottshall chronically has idle capacity. Required: Is the offer from the outside supplier financially attractive? Why?

What is the financial advantage (disadvantage) for the company of processing Product Y beyond the split-off point?

Assume Melville anticipates selling only 50,000 units of Pong to regular customers next year.If Mowen Corporation offers to buy the special order units at $65 per unit, the annual financial advantage (disadvantage) for the company as a result of accepting this special order should be:

The sunk cost in this situation is:

The constraint at Dreyfus 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?

Suppose that if the Doombug toy is dropped, the production and sale of other Draper toys would increase so as to generate a $16,000 increase in the contribution margin received from these other toys.If all other conditions are the same, the financial advantage (disadvantage) from discontinuing the production and sale of Doombugs would be:

Fabri Corporation is considering eliminating a department that has an annual contribution margin of $35,000 and $70,000 in annual fixed costs.Of the fixed costs, $25,000 cannot be avoided.The annual financial advantage (disadvantage) for the company of eliminating this department would be:

Saalfrank Corporation is considering two alternatives that are code-named M and N.Costs associated with the alternatives 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?

Janeiro Skate, Inc.currently manufactures the wheels that it uses for its in-line skates.The annual costs to manufacture the 150,000 wheels needed each year are as follows: Kasba Rubber Company has offered to provide Janeiro with all of its annual wheel needs for $3.50 per wheel.If Janeiro accepts this offer, 75% of the fixed manufacturing overhead above could be totally eliminated.Also, Janeiro would be able to rent out the freed up space and could generate $72,000 of income annually.Assume that direct labor is a variable cost. Required: Based on this information, would Janeiro be financially better off to continue making the wheels or to buy them from Kasba?

Two products, QI and VH, emerge from a joint process.Product QI has been allocated $9,600 of the total joint costs of $12,000.A total of 9,000 units of product QI are produced from the joint process.Product QI can be sold at the split-off point for $13 per unit, or it can be processed further for an additional total cost of $54,000 and then sold for $18 per unit.If product QI is processed further and sold, what would be the financial advantage (disadvantage) for the company compared with sale in its unprocessed form directly after the split-off point?

Assume that dropping Product JYMP will have no effect on other products.The annual financial advantage (disadvantage) for the company of eliminating this product should be:

If management decides to buy part U98 from the outside supplier rather than to continue making the part, what would be the annual financial advantage (disadvantage) ?

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?