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Exam 13: Differential Analysis: the Key to Decision Making

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Question 1

True/False

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When a company has a production constraint, the product with the lowest contribution margin per unit of the constrained resource should usually be given highest priority.

A) True
B) False

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Question 2

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Marley Corporation makes three products (X, Y, & Z) with the following characteristics: The company has a capacity of 2,000 machine hours, but there is virtually unlimited demand for each product. In order to maximize total contribution margin, how many units of each product should the company produce?

A) 2,000 units of X, 500 units of Y, and 200 units of Z
B) 0 units of X, 0 units of Y, and 200 units of Z
C) 0 units of X, 500 units of Y, and 0 units of Z
D) 1,000 units of X, 0 units of Y, and 0 units of Z

E) None of the above
F) All of the above

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Question 3

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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.

Cogdill Corporation manufactures numerous products, one of which is called Epsilon78. The company has provided the following data about this product: Assume that the total traceable fixed expense does not change. If Cogdill increases the price of Epsilon78 to $19.76, what percentage change in unit sales would provide the same net operating income as is currently being earned at a price of $19.00? (Your answer should be rounded to the nearest 0.1%.)

Rapson Pure Water Solutions Corporation has developed a new water purification system-model EN-78-that has been designed to outperform a competitor's best-selling water purification system. Model EN-78 has a useful life of 120,000 hours of service and its operating cost is $0.70 per hour. In contrast, the competitor's product has a useful life of 40,000 hours of service and has operating costs that average $1.20 per hour. The competitor's water purification system sells for $149,000. Rapson has not yet established a selling price for model EN-78.From a value-based pricing standpoint what range of possible prices should Rapson consider when setting a price for EN-78?

In a special order situation, any fixed cost associated with the order would be irrelevant.

The management of Landstrom Corporation would like to set the selling price on a new product using the absorption costing approach to cost-plus pricing. The company's accounting department has supplied the following estimates for the new product: Management plans to produce and sell 4,000 units of the new product annually. The new product would require an investment of $560,000 and has a required return on investment of 10%.Required:a. Determine the unit product cost for the new product.b. Determine the markup percentage on absorption cost for the new product.c. Determine the selling price for the new product using the absorption costing approach. (Round your intermediate and final answer to 2 decimal places.)

A product whose revenues do not cover its variable costs and its traceable fixed costs should usually be dropped.

Melbourne Corporation has traditionally made a subcomponent of its major product. Annual production of 30,000 subcomponents results in the following costs: Melbourne has received an offer from an outside supplier who is willing to provide the 30,000 units of the subcomponent each year at a price of $28 per unit. Melbourne knows that the facilities now being used to manufacture the subcomponent could be rented to another company for $80,000 per year if the subcomponent were purchased from the outside supplier. There would be no effect of this decision on the total fixed manufacturing overhead of the company. Assume that direct labor is a variable cost.At what price per unit charged by the outside supplier would Melbourne be indifferent between making or buying the subcomponent?

Perwin Corporation estimates that an investment of $800,000 would be needed to produce and sell 50,000 units of Product B each year. At this level of activity, the unit product cost would be $50. Selling and administrative expenses would total $400,000 each year. The company uses the absorption costing approach to cost-plus pricing described in the text. If a 20% rate of return on investment is desired, then the required markup for Product B would be closest to:

Ohanlon Corporation manufactures numerous products, one of which is called Delta-27. The company has provided the following data about this product: Required:a. Management is considering increasing the price of Delta-27 by 5%, from $62.00 to $65.10. The company's marketing managers estimate that this price hike would decrease unit sales by 10%, from 210,000 units to 189,000 units. Assuming that the total traceable fixed expense does not change, what net operating income will Delta-27 earn at a price of $65.10 if this sales forecast is correct?b. Assuming that the total traceable fixed expense does not change, if Ohanlon increases the price of Delta-27 to $65.10, what percentage change in unit sales would provide the same net operating income that it currently earns at a price of $62.00? (Round your "Percentage" answer to 1 decimal place.)

Gildersleeve 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 30,000 units per year. The company has invested $600,000 in this product and expects a return on investment of 15%.Required:a. Compute the markup on absorption cost.b. Compute the selling price of the product using the absorption costing approach.

Marvel Corporation estimates that the following costs and activity would be associated with the manufacture and sale of product Y: If the company uses the absorption costing approach to cost-plus pricing described in the text and desires a 15% rate of return on investment (ROI) , the required markup on absorption cost for product Y would be:

Garson, Incorporated 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?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?

"Trueba Electronics Corporation" has developed a new testing instrument-model JJ-92-that has been designed to outperform a competitor's best-selling instrument. Model JJ-92 has a useful life of 100,000 hours of service and its operating cost is $0.50 per hour. In contrast, the competitor's product has a useful life of 20,000 hours of service and has operating costs that average $0.80 per hour. The competitor's instrument sells for $109,000. "Trueba" has not yet established a selling price for model JJ-92. Required: From a value-based pricing standpoint: a. What is the reference value that "Trueba" should consider when pricing model JJ-92? b. What is the differentiation value offered by model JJ-92 relative to the competitor's offering for each 100,000 hours of service? c. What is model JJ-92's economic value to the customer over its 100,000 hour useful life? d. What range of possible prices should "Trueba "consider when setting a price for model JJ-92?

Cranston Corporation makes four products in a single facility. Data concerning these products appear below: The milling machines are potentially the constraint in the production facility. A total of 28,200 minutes are available per month on these machines.How many minutes of milling machine time would be required to satisfy demand for all four products?

Part U67 is used in one of Broce Corporation's products. The company's Accounting Department reports the following costs of producing the 7,000 units of the part that are needed every year. An outside supplier has offered to make the part and sell it to the company for $21.40 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $6,000 of these allocated general overhead costs would be avoided.Required:a. Prepare a report that shows the financial impact of buying part U67 from the supplier rather than continuing to make it inside the company.b. Which alternative should the company choose?

The constraint at Rauchwerger Corporation is time on a particular machine. The company makes three products that use this machine. Data concerning those products appear below: Assume that sufficient time is available on the constrained machine 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? (Round your intermediate calculations to 2 decimal places.)

Glover 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 10,900 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.)

Nance Corporation is about to introduce a new product. The following costs would be incurred if 40,000 units are produced and sold each year: Nance Corporation uses the absorption costing approach to cost-plus pricing as described in the text.Assume that the company has not yet determined a markup to use on the new product. The new product would require an investment of $1,200,000. The company requires a 25% rate of return on investment in all new products. The markup under the absorption costing approach would be closest to: