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Exam 13: Differential Analysis: the Key to Decision Making

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Question 221

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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 29,000 units per year.The company has invested $360,000 in this product and expects a return on investment of 9%.Required:a. Compute the markup on absorption cost.b. Compute the selling price of the product using the absorption costing approach.

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Markup percentage on absorption cos...

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Question 222

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Lakeshore Tours Incorporated, operates a large number of tours throughout the United States. A study has indicated that some of the tours are not profitable, and consideration is being given to dropping these tours in order to improve the company's overall operating performance. One such tour is a two-day Battlefields of the French and Indian Wars bus tour. An income statement from one of these tours is given below: Dropping this tour would not affect the number of buses in the company's fleet or the number of bus drivers on the company's payroll. Buses do not wear out through use; rather, they eventually become obsolete. Bus drivers are paid fixed annual salaries; tour guides are paid for each tour conducted. The "Bus maintenance and preparation" cost above is an allocation of the salaries of mechanics and other service personnel who are responsible for keeping the company's fleet of buses in good operating condition. There would be no change in the number of mechanics and other service personnel as a result of dropping this tour. The liability insurance depends upon the number of buses in the company's fleet and not upon how much they are used. Required: a. Prepare an analysis showing the financial advantage (disadvantage) if this tour is discontinued. b. The company's tour director has been criticized because only about 50% of the seats on the company's tours are being filled as compared to an average of 60% for the industry. The tour director has explained that the company's average seat occupancy could be improved considerably by eliminating about 10% of the tours, but that doing so would reduce profits. Do you agree with the tour director's conclusion? Explain your response.

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b. The elimination of tours with oc...

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Question 223

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Hamby Corporation is preparing a bid for a special order that would require 780 liters of material W34C. The company already has 640 liters of this raw material in stock that originally cost $8.30 per liter. Material W34C is used in the company's main product and is replenished on a periodic basis. The resale value of the existing stock of the material is $7.60 per liter. New stocks of the material can be readily purchased for $8.35 per liter. What is the relevant cost of the 780 liters of the raw material when deciding how much to bid on the special order?

Eytchison Industrial Products Incorporated has developed a new industrial grinder, model OK-23, that is designed to offer superior performance to a comparable grinder sold by Eytchison's main competitor. The competing grinder sells for $33,000 and needs to be replaced after 1,000 hours of use. It also requires $6,000 of preventive maintenance during its useful life. Model OK-23's performance capabilities are similar to the competing grinder with two important exceptions-it needs to be replaced only after 3,000 hours of use and it requires $12,000 of preventive maintenance during its useful life.Required:From a value-based pricing standpoint what is model OK-23's economic value to the customer over its 3,000 hour life?

The following are Silver Corporation's unit costs of making and selling an item at a volume of 7,800 units per month (which represents the company's capacity) : Present sales amount to 6,100 units per month. An order has been received from a customer in a foreign market for 1,700 units. The order would not affect regular sales. Total fixed costs, both manufacturing and selling and administrative, would not be affected by this order. The variable selling and administrative costs would have to be incurred for this special order as well as all other sales. Assume that direct labor is a variable cost.Assume the company has 85 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?

Suire Corporation is considering dropping product D14E. 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 $72,000 of the fixed manufacturing expenses and $48,000 of the fixed selling and administrative expenses are avoidable if product D14E is discontinued.Required:a. According to the company's accounting system, what is the net operating income earned by product D14E?b. What would be the financial advantage (disadvantage) of dropping product D14E? Should the product be dropped?

The book value of an old machine is always considered an opportunity cost in a decision.

Variable selling and administrative costs are excluded from the cost base used to set a selling price under the absorption approach to cost-plus pricing described in the text.

Danny Dolittle makes crafts in his spare time and always sells everything he makes at local craft shows. Danny specializes in four products. Because Danny's time is limited before the next craft show, he is trying to decide how to use his time to the best advantage. Information related to the four products that Danny produces are shown below: Rank the products from the most profitable to the least profitable use of the constrained resource.

Pascal Corporation manufactures numerous products, one of which is called Gamma-66. The company has provided the following data about this product: Assume that the total traceable fixed expense does not change. If Pascal decreases the price of Gamma-66 to $48.96, what percentage change in unit sales would provide the same net operating income as is currently being earned at a price of $51.00? (Your answer should be rounded to the nearest 0.1%.)

Costs associated with two alternatives, code-named Q and R, being considered by Albiston Corporation 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?

Woodridge Corporation manufactures numerous products, one of which is called Alpha-32. The company has provided the following data about this product: Management is considering increasing the price of Alpha-32 by 5%, from $73.00 to $76.65. The company's marketing managers estimate that this price hike would decrease unit sales by 5%, from 78,000 units to 74,100 units. Assuming that the total traceable fixed expense does not change, what net operating income will product Alpha-32 earn at a price of $76.65 if this sales forecast is correct?