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Exam 13: Differential Analysis: the Key to Decision Making

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Question 161

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Gallerani Corporation has received a request for a special order of 4,300 units of product A90 for $26.90 each. Product A90's unit product cost is $26.40, 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 $3.30 per unit and that would require an investment of $22,000 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:

A) $(34,040)
B) $4,875
C) $2,150
D) $(54,610)

E) B) and C)
F) All of the above

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Question 162

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Bruce Corporation makes four products in a single facility. These products have the following unit product costs: Additional data concerning these products are listed below. The grinding machines are potentially the constraint in the production facility. A total of 9,000 minutes are available per month on these machines.Direct labor is a variable cost in this company.Up to how much should the company be willing to pay for one additional minute of grinding machine time if the company has made the best use of the existing grinding machine capacity? (Round your intermediate calculations and final answer to 2 decimal places.)

A) $18.33
B) $12.20
C) $0.00
D) $19.30

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

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Question 163

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Landor Appliance Corporation makes and sells electric fans. Each fan regularly sells for $42. The following cost data per fan is based on a full capacity of 150,000 fans produced each period. A special order has been received by Landor for a sale of 25,000 fans to an overseas customer. The only selling costs that would be incurred on this order would be $4 per fan for shipping. Landor is now selling 120,000 fans through regular channels each period. Assume that direct labor is an avoidable cost in this decision. What should Landor use as a minimum selling price per fan in negotiating a price for this special order?

Two alternatives, code-named X and Y, are under consideration at Guyer Corporation. Costs associated with the alternatives are listed below. What is the financial advantage (disadvantage) of Alternative Y over Alternative X?

The markup over cost under the absorption costing approach would decrease if the required rate of return increases, holding everything else constant.

Chruch Corporation manufactures numerous products, one of which is called Tau-42. The company has provided the following data about this product: Assume that the total traceable fixed expense does not change. If Chruch decreases the price of Tau-42 to $60.16, what percentage change in unit sales would provide the same net operating income as is currently being earned at a price of $64.00? (Your answer should be rounded to the nearest 0.1%.)

Aboud Industrial Products Incorporated has developed a new industrial high pressure pump, model ON-28, that is designed to offer superior performance to a comparable high pressure pump sold by Aboud's main competitor. The competing high pressure pump sells for $87,000 and needs to be replaced after 1,000 hours of use. It also requires $15,000 of preventive maintenance during its useful life. Model ON-28's performance capabilities are similar to the competing high pressure pump with two important exceptions-it needs to be replaced only after 3,000 hours of use and it requires $31,000 of preventive maintenance during its useful life. Required: From a value-based pricing standpoint what range of possible prices should Aboud consider when setting a price for model ON-28?

Holton Company makes three products in a single facility. Data concerning these products follow: The mixing machines are potentially the constraint in the production facility. A total of 14,700 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.)

Bellini Robotics Corporation has developed a new robot-model EM-28-that has been designed to outperform a competitor's best-selling robot. The competitor's product has a useful life of 30,000 hours of service, has operating costs that average $1.40 per hour, and sells for $129,000. In contrast, model EM-28 has a useful life of 90,000 hours of service and its operating cost is $0.80 per hour. Bellini has not yet established a selling price for model EM-28. Required: From a value-based pricing standpoint: a. What is the reference value that Bellini should consider when pricing model EM-28? b. What is the differentiation value offered by model EM-28 relative to the competitor's offering for each 90,000 hours of service? c. What is model EM-28's economic value to the customer over its 90,000 hour useful life? d. What range of possible prices should Bellini consider when setting a price for model EM-28?

Janeiro Skate, Incorporated 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?

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) . (Round your intermediate calculations to 2 decimal places.)

Schimpf Industries Incorporated has developed a new grinder, model WC-13, that is designed to offer superior performance to a comparable grinder sold by Schimpf's main competitor. The competing grinder sells for $64,000 and needs to be replaced after 8,900 hours of use. It also requires $17,800 of preventive maintenance during its useful life. Model WC-13's performance capabilities are similar to the competing product with two important exceptions-it needs to be replaced only after 35,600 hours of use and it requires $44,500 of preventive maintenance during its useful life.From a value-based pricing standpoint what range of possible prices should Schimpf consider when setting a price for model WC-13?

Dock Corporation makes two products from a common input. Joint processing costs up to the split-off point total $33,600 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: What is the financial advantage (disadvantage) for the company of processing Product X beyond the split-off point?

Landor Appliance Corporation makes and sells electric fans. Each fan regularly sells for $31. The following cost data per fan is based on a full capacity of 153,000 fans produced each period. A special order has been received by Landor for a sale of 20,000 fans to an overseas customer. The only selling costs that would be incurred on this order would be $6 per fan for shipping. Landor is now selling 133,000 fans through regular channels each period. Assume that direct labor is an avoidable cost in this decision. What should Landor use as a minimum selling price per fan in negotiating a price for this special order?

Ladle Corporation uses the absorption costing approach to cost-plus pricing described in the text to set prices for its products. Based on budgeted sales of 63,000 units next year, the unit product cost of a particular product is $39.00. The company's selling and administrative expenses for this product are budgeted to be $1,020,600 in total for the year. The company has invested $560,000 in this product and expects a return on investment of 11%.The markup on absorption cost for this product would be closest to:

Thoen Heavy Machinery Corporation has developed a new drill press-model OU-84-that has been designed to outperform a competitor's best-selling drill press. The competitor's product has a useful life of 30,000 hours of service, has operating costs that average $1.60 per hour, and sells for $189,000. In contrast, model OU-84 has a useful life of 120,000 hours of service and its operating cost is $1.00 per hour. Thoen has not yet established a selling price for model OU-84. Required: From a value-based pricing standpoint what range of possible prices should Thoen consider when setting a price for model OU-84?

Farrugia Corporation produces two intermediate products, A and B, from a common input. Intermediate product A can be further processed into Product X. Intermediate product B can be further processed into Product Y. The common input is purchased in batches that cost $36 each and the cost of processing a batch to produce intermediate products A and B is $15. Intermediate product A can be sold as is for $21 or processed further for $14 to make Product X that is sold for $32. Intermediate product B can be sold as is for $44 or processed further for $28 to make Product Y that is sold for $64.Required:a. Assuming that no other costs are involved in processing the common input or in selling products, what is the profit (loss) from processing one batch of the common input into the products X and Y?b. Should each of the intermediate products, A and B, be sold as is or processed further?

Chasin Industries Incorporated has developed a new robot, model JB-32, that is designed to offer superior performance to a comparable robot sold by Chasin's main competitor. The competing robot sells for $11,000 and needs to be replaced after 1,000 hours of use. It also requires $1,000 of preventive maintenance during its useful life. Model JB-32's performance capabilities are similar to the competing product with two important exceptions-it needs to be replaced only after 2,000 hours of use and it requires $1,000 of preventive maintenance during its useful life.From a value-based pricing standpoint what is the reference value that Chasin should consider when pricing model JB-32?

Weitman Corporation manufactures numerous products, one of which is called Epsilon-50. The company has provided the following data about this product: Management is considering increasing the price of Epsilon-50 by 9%, from $29.00 to $31.61. The company's marketing managers estimate that this price hike would decrease unit sales by 15%, from 130,000 units to 110,500 units. Assuming that the total traceable fixed expense does not change, what net operating income will product Epsilon 50 earn at a price of $31.61 if this sales forecast is correct?

Chruch Corporation manufactures numerous products, one of which is called Tau-42. The company has provided the following data about this product: Assume that the total traceable fixed expense does not change. If Chruch decreases the price of Tau-42 to $68.62, what percentage change in unit sales would provide the same net operating income as is currently being earned at a price of $73? (Round your "Percentage" answers to 1 decimal place.)