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Professional Exam Adapted

LO7: Sell or process further

LO6: Value of relaxing constraint

LO5: Utilization of constrained resource

LO4: Special orders

LO3: Make or buy

LO2: Adding or dropping a segment

LO1: Relevant cost concepts

Question Type
T/F
T/F
T/F
T/F
T/F
T/F
T/F
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T/F
T/F
T/F
T/F
T/F
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Conceptual M/C
Conceptual M/C
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Conceptual M/C

Difficulty

Chapter 12 - Differential Analysis: The Key to Decision Making

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CMA

12-1

ID
4/e: 13-768
4/e: 13-771
6/e: 13-1
6/e: 13-5
New,2/15/95,A
New,2/15/95,E
5/e: 13-14
4/e: 13-775
6/e: 13-2
5/e: 13-4
5/e: 13-7
7/e: 13-5
7/e: 13-9
New,2/15/95,N
6/e: 13-6
4/e: 13-770
3/e: 13-3
7/e: 13-17
7/e: 13-38
6/e: 13-55

Origin
Authors
Authors
Authors
Authors
E.N.
E.N.
Authors
Authors
Authors
Authors
Authors
Authors
Authors
E.N.
Authors
Authors
Authors
Authors
CMA
Authors

CMA/CPA origin

CMA,12/92,IV-1

Chapter 12 - Differential Analysis: The Key to Decision Making


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Conceptual M/C
Conceptual M/C
Conceptual M/C

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6/e: 13-43
7/e: 13-21
6/e: 13-23

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24

M/C

CIMA

8/13/2003, Single MC D4

CIMA

25

M/C

CIMA

8/13/2003, Single MC A4

CIMA

26

M/C

CIMA

8/14/2003, Single MC G4

CIMA

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CIMA

8/13/2003, Single MC E4

CIMA

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M/C

CIMA

8/14/2003, Single MC F4

CIMA

29

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CIMA

8/13/2003, Single MC B4

CIMA

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CIMA

8/13/2003, Single MC C4
3/e: 13-2
6/e: 13-24
7/e: 13-63

CIMA
Authors
Authors
CMA

x
x
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CMA

12-2

CIMA, May 1996, Stage 2,


Operational
Cost Accounting, #1.5
CIMA, May 1999, Stage 1,
Cost Accounting and
Quantitative
Methods, #1.8
J. Walker & S. Peers, Cost
Accounting and
Quantitative Methods,
Stage 1 Guidance and
Revision, 3rd Edition,
1996, Question 24
CIMA, May 1997, Stage 2,
Operational
Cost Accounting, #1.5
J. Walker & S. Peers, Cost
Accounting and
Quantitative Methods,
Stage 1 Guidance and
Revision, 3rd Edition,
1996, Question 24
CIMA, Specimen
Questions and Suggested
Answers,
Book 2, 1993, #1.2
C. Wilks, CIMA,
Operational Cost
Accounting, Stage 2,
Guidance & Revision, 3rd
edition, 1996, #5.4

Chapter 12 - Differential Analysis: The Key to Decision Making


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12-3

CIMA

9/30/2004 Single MC J4
9/30/2004 Single MC K4
3/e: 13-19
5/e: 13-65
10/1/2004 Single MC L4
8/14/2003, Single MC H4
10/1/2004 Single MC O4
10/1/2004 Single MC M4
10/1/2004 Single MC N4
3/e: 13-16
10/2/2004 Single MC Q4
10/2/2004 Single MC P4
6/e: 13-50
10/2/2004 Single MC S4
10/2/2004 Single MC R4
5/e: 13-17
10/2/2004 Single MC T4
6/e: 13-27

8/15/2003, Single MC I4
10/9/2004 Single MC X4
10/9/2004 Single MC W4
10/9/2004 Single MC Y4
10/9/2004 Single MC U3
10/9/2004 Single MC V4
9/29/2004 Multi MC C4
9/29/2004 Multi MC B4
5/e: 13-41 to 45
6/e: 13-18 to 21
9/30/2004 Multi MC E4

E.N.
E.N.
Authors
CMA
E.N.
CIMA
E.N.
E.N.
E.N.
Authors
E.N.
E.N.
Authors
E.N.
E.N.
Authors
E.N.
Authors

CIMA
E.N.
E.N.
E.N.
E.N.
E.N.
E.N.
E.N.
Authors
Authors
E.N.

CIMA, Nov 1996, Stage 2,


Operational
Cost Accounting, #1.10

C. Wilks, Operational Cost


Accounting,
Stage 2, Guidance &
Revision, 3rd Edition,
1996, #3.9

Chapter 12 - Differential Analysis: The Key to Decision Making


12-6
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Problem
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12-4

9/30/2004 Multi MC D4
9eLD:CH13Q10-11
5/e: 13-62 to 64
6/e: 13-28 to 29
10/1/2004 Multi MC G4
10/1/2004 Multi MC F4
New,5/29/98,A6
6/e: 13-44 to 45
5/e: 13-23 to 27
6/e: 13-51 to 52
New,5/30/98,E7
5/e: 13-35 to 39
4/e: 13-794 to 797
8/15/2003, Multi MC A4
10/2/2004 Multi MC I4
10/2/2004 Multi MC H4
New,5/29/98,C7
New,5/29/98,B7
6/e: 13-25 to 26
10/9/2004 Multi MC K4
10/9/2004 Multi MC J4
New,5/29/98,D7
6/e: 13-53 to 54
9/27/2004 Problem E4
9/27/2004 Problem F4
9/30/2004 Problem I4
9/30/2004 Problem H4
9/30/2004 Problem G4
5/e: Problem 13-3
3/e: Problem 13-2
8/16/2003, Problem B4

E.N.
Authors
CMA
Authors
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E.N.
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Authors
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CMA
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Authors
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CIMA

CMA, 12/95, Part 4, #18-20

J. Walker and S. Peers,


CIMA, Cost Accounting
and Quantitative
Methods, Stage 1
Guidance & Revision, 3rd

Chapter 12 - Differential Analysis: The Key to Decision Making

Edition, 1996, Question 12


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10/1/2004 Problem J4
10/1/2004 Problem K4
New,5/30/98,F6
1/e:Exam#4,IV

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CMA

8/16/2003, Problem D4
10/2/2004 Problem L4

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CMA
E.N.

142

Problem

CMA

8/16/2003, Problem C4

CMA

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8/16/2003, Problem A4
10/2/2004 Problem M4
New,5/30/98,J6
10/7/2004 Problem N4
New,2/16/95,K
New,5/30/98,G6
New,5/30/98,H6
10/7/2004 Problem O4
10/9/2004 Problem P4
10/9/2004 Problem Q4
New,2/16/95,H
New,5/30/98,I6

CIMA
E.N.
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12-5

CMA, Part 4, Decision


Analysis and Information
Systems,
6/94/, Question 7
CMA, Part 4, Decision
Analysis and Information
Systems,
6/94/, Question 7
J. Walker and S. Peers,
CIMA, Cost Accounting
and Quantitative
Methods, Stage 1
Guidance & Revision, 3rd
Edition, 1996, Question 12

Chapter 12 - Differential Analysis: The Key to Decision Making

Chapter 12
Differential Analysis: The Key to Decision Making
True / False Questions

1. Future costs that do not differ among the alternatives are not relevant in a decision.
True False

2. Fixed costs are irrelevant in a decision.


True False

3. Sunk costs are considered to be avoidable costs.


True False

4. Avoidable costs are also called relevant costs.


True False

5. An avoidable cost is a cost that can be eliminated (in whole or in part) as a result of
choosing one alternative over another.
True False

6. A sunk cost is a cost that has already been incurred and that cannot be avoided regardless of
what action is chosen.
True False

7. The book value of a machine, as shown on the balance sheet, is relevant in a decision
concerning the replacement of that machine by another machine.
True False

12-6

Chapter 12 - Differential Analysis: The Key to Decision Making

8. If by dropping a product a firm can avoid more in fixed costs than it loses in contribution
margin, then the firm is better off economically if the product is dropped.
True False

9. Generally, a product line should be dropped when the fixed costs that can be avoided by
dropping the product line are less than the contribution margin that will be lost.
True False

10. The cost of a resource that has no alternative use in a make or buy decision problem has
an opportunity cost of zero.
True False

11. Vertical integration is the involvement by a company in more than one of the steps from
securing basic raw materials to the production and distribution of a finished product.
True False

12. Depreciation expense on existing factory equipment is generally relevant to a decision of


whether to accept or reject a special offer for a company's product.
True False

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

14. Managers should not authorize working overtime at a work station that contains a
bottleneck.
True False

12-7

Chapter 12 - Differential Analysis: The Key to Decision Making

15. Joint costs are not relevant to the decision to sell a product at the split-off point or to
process the product further.
True False

16. Joint production costs are relevant costs in decisions about what to do with a product from
the split-off point onward in the production process.
True False

Multiple Choice Questions

17. Costs which are always relevant in decision making are those costs which are:
A. variable.
B. avoidable.
C. sunk.
D. fixed.

18. A general rule in relevant cost analysis is:


A. variable costs are always relevant.
B. fixed costs are always irrelevant.
C. differential future costs and revenues are always relevant.
D. depreciation is always irrelevant.

19. The opportunity cost of making a component part in a factory with no excess capacity is
the:
A. variable manufacturing cost of the component.
B. fixed manufacturing cost of the component.
C. total manufacturing cost of the component.
D. net benefit foregone from the best alternative use of the capacity required.

12-8

Chapter 12 - Differential Analysis: The Key to Decision Making

20. Freestone Company is considering renting Machine Y to replace Machine X. It is


expected that Y will waste less direct materials than does X. If Y is rented, X will be sold on
the open market. For this decision, which of the following factors is (are) relevant?
I. Cost of direct materials used
II. Resale value of Machine X
A. Only I
B. Only II
C. Both I and II
D. Neither I nor II

21. Which of the following are valid reasons for eliminating a product line?
I. The product line's contribution margin is negative.
II. The product line's traceable fixed costs plus its allocated common corporate costs are less
than its contribution margin.
A. Only I
B. Only II
C. Both I and II
D. Neither I nor II

22. When there is a production constraint, a company should emphasize the products with:
A. the highest unit contribution margins.
B. the highest contribution margin ratios.
C. the highest contribution margin per unit of the constrained resource.
D. the highest contribution margins and contribution margin ratios.

23. In a sell or process further decision, which of the following costs are relevant?
I. A variable production cost incurred prior to the split-off point.
II. An avoidable fixed production cost incurred after the split-off point.
A. Only I.
B. Only II.
C. Both I and II.
D. Neither I nor II.

12-9

Chapter 12 - Differential Analysis: The Key to Decision Making

24. Scherer Corporation is preparing a bid for a special order that would require 720 liters of
material U48N. The company already has 560 liters of this raw material in stock that
originally cost $6.30 per liter. Material U48N 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 $5.80
per liter. New stocks of the material can be readily purchased for $6.65 per liter. What is the
relevant cost of the 720 liters of the raw material when deciding how much to bid on the
special order?
A. $4,592
B. $4,788
C. $4,456
D. $4,176

25. Cung Inc. has some material that originally cost $68,400. The material has a scrap value
of $30,100 as is, but if reworked at a cost of $1,400, it could be sold for $30,800. What would
be the incremental effect on the company's overall profit of reworking and selling the material
rather than selling it as is as scrap?
A. -$69,100
B. -$700
C. $29,400
D. -$39,000

12-10

Chapter 12 - Differential Analysis: The Key to Decision Making

26. Liffick Corporation is a specialty component manufacturer with idle capacity.


Management would like to use its extra capacity to generate additional profits. A potential
customer has offered to buy 6,200 units of component VFG. Each unit of VFG requires 8
units of material C79 and 6 units of material X70. Data concerning these two materials
follow:

Material C79 is in use in many of the company's products and is routinely replenished.
Material X70 is no longer used by the company in any of its normal products and existing
stocks would not be replenished once they are used up.
What would be the relevant cost of the materials, in total, for purposes of determining a
minimum acceptable price for the order for product VFG?
A. $528,551
B. $523,280
C. $476,350
D. $484,455

27. Schemm Inc. regularly uses material F04E and currently has in stock 460 liters of the
material for which it paid $2,622 several weeks ago. If this were to be sold as is on the open
market as surplus material, it would fetch $5.25 per liter. New stocks of the material can be
purchased on the open market for $5.85 per liter, but it must be purchased in lots of 1,000
liters. You have been asked to determine the relevant cost of 800 liters of the material to be
used in a job for a customer. The relevant cost of the 800 liters of material F04E is:
A. $5,850
B. $4,200
C. $4,404
D. $4,680

12-11

Chapter 12 - Differential Analysis: The Key to Decision Making

28. Stampka Corporation is a specialty component manufacturer with idle capacity.


Management would like to use its extra capacity to generate additional profits. A potential
customer has offered to buy 4,200 units of component JJF. Each unit of JJF requires 6 units of
material O38 and 9 units of material P56. Data concerning these two materials follow:

Material O38 is in use in many of the company's products and is routinely replenished.
Material P56 is no longer used by the company in any of its normal products and existing
stocks would not be replenished once they are used up.
What would be the relevant cost of the materials, in total, for purposes of determining a
minimum acceptable price for the order for product JJF?
A. $146,790
B. $199,080
C. $155,610
D. $212,340

29. Janus Corporation has in stock 43,700 kilograms of material L that it bought five years
ago for $6.10 per kilogram. This raw material was purchased to use in a product line that has
been discontinued. Material L can be sold as is for scrap for $3.23 per kilogram. An
alternative would be to use material L in one of the company's current products, E99D, which
currently requires 2 kilograms of a raw material that is available for $9.45 per kilogram.
Material L can be modified at a cost of $0.62 per kilogram so that it can be used as a
substitute for this material in the production of product E99D. However, after modification, 3
kilograms of material L is required for every unit of product E99D that is produced. Janus
Corporation has now received a request from a company that could use material L in its
production process. Assuming that Janus Corporation could use all of its stock of material L
to make product E99D or the company could sell all of its stock of the material at the current
scrap price of $3.23 per kilogram, what is the minimum acceptable selling price of material L
to the company that could use material L in its own production process?
A. $3.23
B. $5.68
C. $6.92
D. $2.45

12-12

Chapter 12 - Differential Analysis: The Key to Decision Making

30. Lampshire Inc. is considering using stocks of an old raw material in a special project. The
special project would require all 160 kilograms of the raw material that are in stock and that
originally cost the company $1,136 in total. If the company were to buy new supplies of this
raw material on the open market, it would cost $7.25 per kilogram. However, the company
has no other use for this raw material and would sell it at the discounted price of $6.50 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 $75 for all 160 kilograms. What is the relevant cost
of the 160 kilograms of the raw material when deciding whether to proceed with the special
project?
A. $1,040
B. $965
C. $1,136
D. $1,160

31. A study has been conducted to determine if Product A should be dropped. Sales of the
product total $200,000 per year; variable expenses total $140,000 per year. Fixed expenses
charged to the product total $90,000 per year. The company estimates that $40,000 of these
fixed expenses will continue even if the product is dropped. These data indicate that if
Product A is dropped, the company's overall net operating income would:
A. decrease by $20,000 per year
B. increase by $20,000 per year
C. decrease by $10,000 per year
D. increase by $30,000 per year

12-13

Chapter 12 - Differential Analysis: The Key to Decision Making

32. The Kelsh Company has two divisions--North and South. The divisions have the
following revenues and expenses:

Management at Kelsh is pondering the elimination of North Division. If North Division were
eliminated, its traceable fixed expenses could be avoided. The total common corporate
expenses would be unaffected. Given these data, the elimination of North Division would
result in an overall company net operating income of:
A. $100,000
B. $150,000
C. $(140,000)
D. $50,000

33. Power Systems Inc. manufactures jet engines for the United States armed forces on a costplus basis. The production cost of a particular jet engine is shown below:

If production of this engine was discontinued, the production capacity would be idle, and the
supervisor would be laid off. The depreciation referred to above is for special equipment that
would have no resale value and that does not wear out through use. When asked to bid on the
next contract for this engine, the minimum unit price that Power Systems should bid is:
A. $408,000
B. $365,000
C. $397,000
D. $385,000

12-14

Chapter 12 - Differential Analysis: The Key to Decision Making

34. The management of Heider Corporation is considering dropping product J14V. Data from
the company's accounting system appear below:

In the company's accounting system all fixed expenses of the company are fully allocated to
products. Further investigation has revealed that $211,000 of the fixed manufacturing
expenses and $172,000 of the fixed selling and administrative expenses are avoidable if
product J14V is discontinued. What would be the effect on the company's overall net
operating income if product J14V were dropped?
A. Overall net operating income would decrease by $55,000.
B. Overall net operating income would increase by $160,000.
C. Overall net operating income would increase by $55,000.
D. Overall net operating income would decrease by $160,000.

35. Product R19N has been considered a drag on profits at Buzzeo Corporation for some time
and management is considering discontinuing the product altogether. Data from the
company's accounting system appear below:

In the company's accounting system all fixed expenses of the company are fully allocated to
products. Further investigation has revealed that $49,000 of the fixed manufacturing expenses
and $30,000 of the fixed selling and administrative expenses are avoidable if product R19N is
discontinued. What would be the effect on the company's overall net operating income if
product R19N were dropped?
A. Overall net operating income would decrease by $59,000.
B. Overall net operating income would decrease by $22,000.
C. Overall net operating income would increase by $59,000.
D. Overall net operating income would increase by $22,000.

12-15

Chapter 12 - Differential Analysis: The Key to Decision Making

36. Lusk Company produces and sells 15,000 units of Product A each month. The selling
price of Product A is $20 per unit, and variable expenses are $14 per unit. A study has been
made concerning whether Product A should be discontinued. The study shows that $70,000 of
the $100,000 in fixed expenses charged to Product A would continue even if the product was
discontinued. These data indicate that if Product A is discontinued, the company's overall net
operating income would:
A. decrease by $60,000 per month
B. increase by $10,000 per month
C. increase by $20,000 per month
D. decrease by $20,000 per month

37. Peluso Company, a manufacturer of snowmobiles, is operating at 70% of plant capacity.


Peluso's plant manager is considering making the headlights now being purchased from an
outside supplier for $11 each. The Peluso plant has idle equipment that could be used to
manufacture the headlights. The design engineer estimates that each headlight requires $4 of
direct materials, $3 of direct labor, and $6.00 of manufacturing overhead. Forty percent of the
manufacturing overhead is a fixed cost that would be unaffected by this decision. A decision
by Peluso Company to manufacture the headlights should result in a net gain (loss) for each
headlight of:
A. $(2.00)
B. $1.60
C. $0.40
D. $2.80

12-16

Chapter 12 - Differential Analysis: The Key to Decision Making

38. Part I51 is used in one of Pries Corporation's products. The company makes 18,000 units
of this part each year. The company's Accounting Department reports the following costs of
producing the part at this level of activity:

An outside supplier has offered to produce this part and sell it to the company for $15.80
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 $26,000 of these allocated general overhead costs would be avoided.
If management decides to buy part I51 from the outside supplier rather than to continue
making the part, what would be the annual impact on the company's overall net operating
income?
A. Net operating income would decline by $81,800 per year.
B. Net operating income would decline by $55,800 per year.
C. Net operating income would decline by $119,800 per year.
D. Net operating income would decline by $29,800 per year.

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Chapter 12 - Differential Analysis: The Key to Decision Making

39. Iwasaki Inc. is considering whether to continue to make a component or to buy it from an
outside supplier. The company uses 13,000 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 minute on the machine that is the company's current constraint. If the
component were bought, this machine time would be freed up for use on another product that
requires 2 minutes on this machine and that has a contribution margin of $5.20 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?
A. $22.40
B. $19.80
C. $17.28
D. $19.88

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Chapter 12 - Differential Analysis: The Key to Decision Making

40. Part N29 is used by Farman Corporation to make one of its products. A total of 11,000
units of this part are produced and used every year. The company's Accounting Department
reports the following costs of producing the part at this level of activity:

An outside supplier has offered to make the part and sell it to the company for $21.20 each. If
this offer is accepted, the supervisor's salary and all of the variable costs, including the 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, none of which would be avoided if the part were purchased
instead of produced internally. In addition, the space used to make part N29 could be used to
make more of one of the company's other products, generating an additional segment margin
of $29,000 per year for that product. What would be the impact on the company's overall net
operating income of buying part N29 from the outside supplier?
A. Net operating income would decline by $38,900 per year.
B. Net operating income would increase by $29,000 per year.
C. Net operating income would decline by $32,600 per year.
D. Net operating income would increase by $19,100 per year.

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Chapter 12 - Differential Analysis: The Key to Decision Making

41. Fillip Corporation makes 4,000 units of part U13 each year. This part is used in one of the
company's products. The company's Accounting Department reports the following costs of
producing the part at this level of activity:

An outside supplier has offered to make and sell the part to the company for $21.60 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 $3,000 of
these allocated general overhead costs would be avoided. In addition, the space used to
produce part U13 would be used to make more of one of the company's other products,
generating an additional segment margin of $13,000 per year for that product.
What would be the impact on the company's overall net operating income of buying part U13
from the outside supplier?
A. Net operating income would increase by $13,000 per year.
B. Net operating income would decline by $42,600 per year.
C. Net operating income would decline by $68,600 per year.
D. Net operating income would increase by $9,200 per year.

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Chapter 12 - Differential Analysis: The Key to Decision Making

42. Ethridge Corporation is presently making part H25 that is used in one of its products. A
total of 9,000 units of this part are produced and used every year. The company's Accounting
Department reports the following costs of producing the part at this level of activity:

An outside supplier has offered to make and sell the part to the company for $15.40 each. If
this offer is accepted, the supervisor's salary and all of the variable costs 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, none of which would be avoided if the part were purchased instead of produced
internally. If management decides to buy part H25 from the outside supplier rather than to
continue making the part, what would be the annual impact on the company's overall net
operating income?
A. Net operating income would increase by $24,300 per year.
B. Net operating income would decline by $24,300 per year.
C. Net operating income would increase by $58,500 per year.
D. Net operating income would decline by $58,500 per year.

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Chapter 12 - Differential Analysis: The Key to Decision Making

43. Pitkin Company produces a part used in the manufacture of one of its products. The unit
product cost of the part is $33, computed as follows:

An outside supplier has offered to provide the annual requirement of 10,000 of the parts for
only $27 each. The company estimates that 30% of the fixed manufacturing overhead costs
above will continue if the parts are purchased from the outside supplier. Assume that direct
labor is an avoidable cost in this decision. Based on these data, the per unit dollar advantage
or disadvantage of purchasing the parts from the outside supplier would be:
A. $3 advantage
B. $1 advantage
C. $1 disadvantage
D. $4 disadvantage

44. A customer has requested that Inga Corporation fill a special order for 2,000 units of
product K81 for $25.00 a unit. While the product would be modified slightly for the special
order, product K81's normal unit product cost is $19.90:

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
K81 that would increase the variable costs by $1.20 per unit and that would require an
investment of $10,000 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. If the special order is accepted, the company's
overall net operating income would increase (decrease) by:
A. $13,000
B. $(9,700)
C. $10,200
D. $(2,200)

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Chapter 12 - Differential Analysis: The Key to Decision Making

45. Rojo Corporation has received a request for a special order of 8,000 units of product W68
for $27.20 each. Product W68's unit product cost is $18.50, determined 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 modifications made to product
W68 that would increase the variable costs by $7.90 per unit and that would require an
investment of $31,000 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. If the special order is accepted, the company's
overall net operating income would increase (decrease) by:
A. $(4,400)
B. $69,600
C. $30,600
D. $(24,600)

46. Ellis Television makes and sells portable televisions. Each television regularly sells for
$210. The following cost data per television is based on a full capacity of 10,000 televisions
produced each period.

A special order has been received by Ellis for a sale of 2,000 televisions to an overseas
customer. The only selling costs that would be incurred on this order would be $6 per
television for shipping. Ellis is now selling 6,000 televisions through regular channels each
period. What should be the minimum selling price per television in negotiating a price for this
special order?
A. $174
B. $168
C. $210
D. $180

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Chapter 12 - Differential Analysis: The Key to Decision Making

47. An automated turning machine is the current constraint at Naik Corporation. Three
products use this constrained resource. Data concerning those products appear below:

Rank the products in order of their current profitability from most profitable to least
profitable. In other words, rank the products in the order in which they should be emphasized.
A. OP, KU, YY
B. YY, OP, KU
C. KU, YY, OP
D. YY, KU, OP

48. Pappan Corporation makes three products that use compound W, the current constrained
resource. Data concerning those products appear below:

Rank the products in order of their current profitability from most profitable to least
profitable. In other words, rank the products in the order in which they should be emphasized.
A. RH, GY, QF
B. GY, RH, QF
C. QF, GY, RH
D. RH, QF, GY

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Chapter 12 - Differential Analysis: The Key to Decision Making

49. Consider the following production and cost data for two products, X and Y:

The company has 15,000 machine hours available each period, and there is unlimited demand
for each product. What is the largest possible total contribution margin that can be realized
each period?
A. $120,000
B. $125,000
C. $135,000
D. $150,000

50. The constraint at Mcglathery 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?
A. $75.26 per unit
B. $38.94 per unit
C. $11.80 per minute
D. $15.20 per minute

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Chapter 12 - Differential Analysis: The Key to Decision Making

51. Wright Company produces products I, J, and K from a single raw material input.
Budgeted data for the next month follows:

If the cost of the raw material input is $78,000, which of the products should be processed
beyond the split-off point?

A. Option A
B. Option B
C. Option C
D. Option D

52. Two products, IF and RI, emerge from a joint process. Product IF has been allocated
$25,300 of the total joint costs of $46,000. A total of 2,000 units of product IF are produced
from the joint process. Product IF can be sold at the split-off point for $11 per unit, or it can
be processed further for an additional total cost of $10,000 and then sold for $13 per unit. If
product IF is processed further and sold, what would be the effect on the overall profit of the
company compared with sale in its unprocessed form directly after the split-off point?
A. $31,300 less profit
B. $6,000 less profit
C. $16,000 more profit
D. $19,300 more profit

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Chapter 12 - Differential Analysis: The Key to Decision Making

53. Coakley Beet Processors, Inc., processes sugar beets in batches. A batch of sugar beets
costs $48 to buy from farmers and $10 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 $24 or processed further for $16 to make the end product industrial fiber that is
sold for $36. The beet juice can be sold as is for $44 or processed further for $28 to make the
end product refined sugar that is sold for $70. How much profit (loss) does the company make
by processing the intermediate product beet juice into refined sugar rather than selling it as
is?
A. $(31)
B. $(60)
C. $(2)
D. $(12)

54. Galluzzo Corporation processes sugar beets in batches. A batch of sugar beets costs $51 to
buy from farmers and $14 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 $20
or processed further for $18 to make the end product industrial fiber that is sold for $45. The
beet juice can be sold as is for $41 or processed further for $21 to make the end product
refined sugar that is sold for $62. How much profit (loss) does the company make by
processing one batch of sugar beets into the end products industrial fiber and refined sugar?
A. $(104)
B. $(4)
C. $7
D. $3

12-27

Chapter 12 - Differential Analysis: The Key to Decision Making

55. Beilke Corporation processes sugar beets in batches that it purchases from farmers for $53
a batch. A batch of sugar beets costs $12 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 $20 or processed further for $10 to make the end product industrial fiber that is
sold for $26. The beet juice can be sold as is for $30 or processed further for $29 to make the
end product refined sugar that is sold for $79. Which of the intermediate products should be
processed further?
A. beet fiber should be processed into industrial fiber; beet juice should be processed into
refined sugar
B. beet fiber should NOT be processed into industrial fiber; beet juice should be processed
into refined sugar
C. beet fiber should NOT be processed into industrial fiber; beet juice should NOT be
processed into refined sugar
D. beet fiber should be processed into industrial fiber; beet juice should NOT be processed
into refined sugar

12-28

Chapter 12 - Differential Analysis: The Key to Decision Making

56. Zollars Cane Products, Inc., processes sugar cane in batches. The company buys a batch
of sugar cane from farmers for $70 which is then crushed in the company's plant at a cost of
$19. Two intermediate products, cane fiber and cane juice, emerge from the crushing process.
The cane fiber can be sold as is for $21 or processed further for $13 to make the end product
industrial fiber that is sold for $42. The cane juice can be sold as is for $44 or processed
further for $26 to make the end product molasses that is sold for $88. How much profit (loss)
does the company make by processing one batch of sugar cane into the end products industrial
fiber and molasses?
A. $26
B. $2
C. $(24)
D. $(128)

57. Kempler Corporation processes sugar cane in batches. The company purchases a batch of
sugar cane for $34 from farmers and then crushes the cane in the company's plant at the cost
of $15. Two intermediate products, cane fiber and cane juice, emerge from the crushing
process. The cane fiber can be sold as is for $26 or processed further for $17 to make the end
product industrial fiber that is sold for $41. The cane juice can be sold as is for $32 or
processed further for $22 to make the end product molasses that is sold for $51. Which of the
intermediate products should be processed further?
A. Cane fiber should be processed into industrial fiber; Cane juice should be processed into
molasses
B. Cane fiber should NOT be processed into industrial fiber; Cane juice should NOT be
processed into molasses
C. Cane fiber should be processed into industrial fiber; Cane juice should NOT be processed
into molasses
D. Cane fiber should NOT be processed into industrial fiber; Cane juice should be processed
into molasses

Two alternatives, code-named X and Y, are under consideration at Afalava Corporation.


Costs associated with the alternatives are listed below.

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Chapter 12 - Differential Analysis: The Key to Decision Making

58. Are the materials costs and processing costs relevant in the choice between alternatives X
and Y? (Ignore the equipment rental and occupancy costs in this question.)
A. Only materials costs are relevant
B. Only processing costs are relevant
C. Both materials costs and processing costs are relevant
D. Neither materials costs nor processing costs are relevant

59. What is the differential cost of Alternative Y over Alternative X, including all of the
relevant costs?
A. $103,000
B. $39,000
C. $142,000
D. $122,500

Zurasky Corporation is considering two alternatives: A and B. Costs associated with the
alternatives are listed below:

60. Are the materials costs and processing costs relevant in the choice between alternatives A
and B? (Ignore the equipment rental and occupancy costs in this question.)
A. Neither materials costs nor processing costs are relevant
B. Only processing costs are relevant
C. Only materials costs are relevant
D. Both materials costs and processing costs are relevant

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Chapter 12 - Differential Analysis: The Key to Decision Making

61. What is the differential cost of Alternative B over Alternative A, including all of the
relevant costs?
A. $44,000
B. $149,000
C. $105,000
D. $127,000

Austin Wool Products purchases raw wool and processes it into yarn. The spindles of yarn
can then be sold directly to stores or they can be used by Austin Wool Products to make
afghans. Each afghan requires one spindle of yarn. Current cost and revenue data for the
spindles of yarn and for the afghans are as follows:

Each month 4,000 spindles of yarn are produced that can either be sold outright or processed
into afghans.

62. If Austin chooses to produce 4,000 afghans each month, the change in the monthly net
operating income as compared to selling 4,000 spindles of yarn is:
A. $24,000 decrease
B. $24,000 increase
C. $16,000 decrease
D. $16,000 increase

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Chapter 12 - Differential Analysis: The Key to Decision Making

63. What is the lowest price Austin should be willing to accept for one afghan as long as it
can sell spindles of yarn to the outside market for $12 each?
A. $32
B. $30
C. $28
D. $26

The Tingey Company has 500 obsolete microcomputers that are carried in inventory at a total
cost of $720,000. If these microcomputers are upgraded at a total cost of $100,000, they can
be sold for a total of $160,000. As an alternative, the microcomputers can be sold in their
present condition for $50,000.

64. The sunk cost in this situation is:


A. $720,000
B. $160,000
C. $50,000
D. $100,000

65. What is the net advantage or disadvantage to the company from upgrading the computers
rather than selling them in their present condition?
A. $110,000 advantage
B. $660,000 disadvantage
C. $10,000 advantage
D. $60,000 advantage

66. Suppose the selling price of the upgraded computers has not been set. At what selling
price per unit would the company be as well off upgrading the computers as if it just sold the
computers in their present condition?
A. $100
B. $770
C. $300
D. $210

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Chapter 12 - Differential Analysis: The Key to Decision Making

The management of Fries Corporation has been concerned for some time with the financial
performance of its product R89H and has considered discontinuing it on several occasions.
Data from the company's accounting system appear below:

In the company's accounting system all fixed expenses of the company are fully allocated to
products. Further investigation has revealed that $31,000 of the fixed manufacturing expenses
and $46,000 of the fixed selling and administrative expenses are avoidable if product R89H is
discontinued.

67. According to the company's accounting system, what is the net operating income earned
by product R89H?
A. $143,000
B. $8,000
C. $(8,000)
D. $(143,000)

68. What would be the effect on the company's overall net operating income if product R89H
were dropped?
A. Overall net operating income would decrease by $66,000.
B. Overall net operating income would decrease by $8,000.
C. Overall net operating income would increase by $66,000.
D. Overall net operating income would increase by $8,000.

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Chapter 12 - Differential Analysis: The Key to Decision Making

The management of Freshwater Corporation is considering dropping product C11B. 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 $211,000 of the fixed manufacturing expenses
and $122,000 of the fixed selling and administrative expenses are avoidable if product C11B
is discontinued.

69. According to the company's accounting system, what is the net operating income earned
by product C11B?
A. $74,000
B. $(521,000)
C. $(74,000)
D. $521,000

70. What would be the effect on the company's overall net operating income if product C11B
were dropped?
A. Overall net operating income would decrease by $188,000.
B. Overall net operating income would increase by $74,000.
C. Overall net operating income would decrease by $74,000.
D. Overall net operating income would increase by $188,000.

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Chapter 12 - Differential Analysis: The Key to Decision Making

The Western Company is considering the addition of a new product to its current product
lines. The expected cost and revenue data for the new product are as follows:

If the new product is added to the existing product line, then sales of existing products will
decline. As a consequence, the contribution margin of the other existing product lines is
expected to drop $78,000 per year.

71. If the new product is added next year, the increase in net operating income resulting from
this decision would be:
A. $387,000
B. $261,000
C. $183,000
D. $207,000

72. What is the lowest selling price per unit among those listed below that could be charged
for the new product and still make it economically desirable to add the new product?
A. $240
B. $222
C. $291
D. $249

12-35

Chapter 12 - Differential Analysis: The Key to Decision Making

Condensed monthly operating income data for Cosmo Inc. for November is presented below.
Additional information regarding Cosmo's operations follows the statement.

Three-quarters of each store's traceable fixed expenses are avoidable if the store were to be
closed.
Cosmo allocates common fixed expenses to each store on the basis of sales dollars.
Management estimates that closing the Town Store would result in a ten percent decrease in
Mall Store sales, while closing the Mall Store would not affect Town Store sales.
The operating results for November are representative of all months.

73. A decision by Cosmo Inc. to close the Town Store would result in a monthly increase
(decrease) in Cosmo's operating income of:
A. $4,000
B. $(10,800)
C. $(800)
D. $(6,000)

74. Cosmo is considering a promotional campaign at the Town Store that would not affect the
Mall Store. Increasing annual promotional expenses at the Town Store by $60,000 in order to
increase Town Store sales by ten percent would result in a monthly increase (decrease) in
Cosmo's operating income of:
A. $(16,800)
B. $3,400
C. $7,000
D. $(1,400)

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Chapter 12 - Differential Analysis: The Key to Decision Making

The Cabinet Shoppe is considering the addition of a new line of kitchen cabinets to its current
product lines. Expected cost and revenue data for the new cabinets are as follows:

If the new cabinets are added, it is expected that the contribution margin of other product lines
at the cabinet shop will drop by $20,000 per year.

75. If the new cabinet product line is added next year, the increase in net operating income
resulting from this decision would be:
A. $80,000
B. $225,000
C. $125,000
D. $105,000

76. What is the lowest selling price per unit that could be charged for the new cabinets from
the following list and still make it economically desirable to add the new product line?
A. $160
B. $164
C. $171
D. $151

12-37

Chapter 12 - Differential Analysis: The Key to Decision Making

Knaack Corporation is presently making part R20 that is used in one of its products. A total
of 18,000 units of this part are produced and used every year. The company's Accounting
Department reports the following costs of producing the part at this level of activity:

An outside supplier has offered to produce and sell the part to the company for $27.70 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, none of which would be avoided if the part were purchased
instead of produced internally.

77. If management decides to buy part R20 from the outside supplier rather than to continue
making the part, what would be the annual impact on the company's overall net operating
income?
A. Net operating income would increase by $162,000 per year.
B. Net operating income would increase by $50,400 per year.
C. Net operating income would decline by $50,400 per year.
D. Net operating income would decline by $162,000 per year.

78. In addition to the facts given above, assume that the space used to produce part R20 could
be used to make more of one of the company's other products, generating an additional
segment margin of $27,000 per year for that product. What would be the impact on the
company's overall net operating income of buying part R20 from the outside supplier and
using the freed space to make more of the other product?
A. Net operating income would increase by $27,000 per year.
B. Net operating income would decline by $135,000 per year.
C. Net operating income would decline by $23,400 per year.
D. Net operating income would decline by $189,000 per year.

12-38

Chapter 12 - Differential Analysis: The Key to Decision Making

Meltzer Corporation is presently making part O13 that is used in one of its products. A total
of 3,000 units of this part are produced and used every year. The company's Accounting
Department reports the following costs of producing the part at this level of activity:

An outside supplier has offered to produce and sell the part to the company for $27.00 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 $3,000 of
these allocated general overhead costs would be avoided.

79. If management decides to buy part O13 from the outside supplier rather than to continue
making the part, what would be the annual impact on the company's overall net operating
income?
A. Net operating income would decline by $23,100 per year.
B. Net operating income would decline by $26,100 per year.
C. Net operating income would decline by $20,100 per year.
D. Net operating income would decline by $8,700 per year.

80. In addition to the facts given above, assume that the space used to produce part O13 could
be used to make more of one of the company's other products, generating an additional
segment margin of $26,000 per year for that product. What would be the impact on the
company's overall net operating income of buying part O13 from the outside supplier and
using the freed space to make more of the other product?
A. Net operating income would decline by $49,100 per year.
B. Net operating income would increase by $26,000 per year.
C. Net operating income would increase by $2,900 per year.
D. Net operating income would increase by $17,300 per year.

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Chapter 12 - Differential Analysis: The Key to Decision Making

Ahsan Company 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 $45.70 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 $318,000 per year.
If the part were purchased from the outside supplier, all of the direct labor cost of the part
would be avoided. However, $3.50 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.

81. How much of the unit product cost of $40.50 is relevant in the decision of whether to
make or buy the part?
A. $40.50
B. $15.20
C. $27.90
D. $37.00

82. What is the net total dollar advantage (disadvantage) of purchasing the part rather than
making it?
A. $318,000
B. $(522,000)
C. $(312,000)
D. $(204,000)

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Chapter 12 - Differential Analysis: The Key to Decision Making

83. 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?
A. $40.50
B. $42.30
C. $45.80
D. $5.30

Talboe Company makes wheels which it uses in the production of children's wagons.
Talboe's costs to produce 200,000 wheels annually are as follows:

An outside supplier has offered to sell Talboe similar wheels for $0.80 per wheel. If the
wheels are purchased from the outside supplier, $25,000 of annual fixed manufacturing
overhead would be avoided and the facilities now being used to make the wheels would be
rented to another company for $55,000 per year.

84. If Talboe chooses to buy the wheel from the outside supplier, then the change in annual
net operating income is a:
A. $5,000 decrease
B. $50,000 increase
C. $70,000 increase
D. $40,000 increase

85. What is the highest price that Talboe could pay the outside supplier for each wheel and
still be economically indifferent between making or buying the wheels?
A. $0.95
B. $1.15
C. $1.00
D. $1.05

12-41

Chapter 12 - Differential Analysis: The Key to Decision Making

The Rodgers Company makes 27,000 units of a certain component each year for use in one
of its products. The cost per unit for the component at this level of activity is as follows:

Rodgers has received an offer from an outside supplier who is willing to provide 27,000 units
of this component each year at a price of $25 per component. Assume that direct labor is a
variable cost. None of the fixed manufacturing overhead would be avoidable if this
component were purchased from the outside supplier.

86. Assume that there is no other use for the capacity now being used to produce the
component and the total fixed manufacturing overhead of the company would be unaffected
by this decision. If Rodgers Company purchases the components rather than making them
internally, what would be the impact on the company's annual net operating income?
A. $94,500 increase
B. $81,000 decrease
C. $237,600 decrease
D. $124,000 increase

87. Assume that if the component is purchased from the outside supplier, $35,100 of annual
fixed manufacturing overhead would be avoided and the facilities now being used to make the
component would be rented to another company for $64,800 per year. If Rodgers chooses to
buy the component from the outside supplier under these circumstances, then the impact on
annual net operating income due to accepting the offer would be:
A. $18,900 decrease
B. $18,900 increase
C. $21,400 decrease
D. $21,400 increase

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Chapter 12 - Differential Analysis: The Key to Decision Making

Meacham Company has traditionally made a subcomponent of its major product. Annual
production of 20,000 subcomponents results in the following costs:

Meacham has received an offer from an outside supplier who is willing to provide 20,000
units of this subcomponent each year at a price of $28 per subcomponent. Meacham knows
that the facilities now being used to make the subcomponent would be rented to another
company for $75,000 per year if the subcomponent were purchased from the outside supplier.
Otherwise, the fixed overhead would be unaffected.

88. If Meacham decides to purchase the subcomponent from the outside supplier, how much
higher or lower will net operating income be than if Meacham continued to make the
subcomponent?
A. $45,000 higher
B. $70,000 higher
C. $30,000 lower
D. $70,000 lower

89. Suppose the price for the subcomponent has not been set. At what price per unit charged
by the outside supplier would Meacham be economically indifferent between making the
subcomponent or buying it from the outside?
A. $30.25
B. $29.25
C. $26.50
D. $31.50

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Chapter 12 - Differential Analysis: The Key to Decision Making

Elhard Company produces a single product. The cost of producing and selling a single unit of
this product at the company's normal activity level of 40,000 units per month is as follows:

The normal selling price of the product is $51.10 per unit.


An order has been received from an overseas customer for 2,000 units to be delivered this
month at a special discounted price. This order would have no effect on the company's normal
sales and would not change the total amount of the company's fixed costs. The variable selling
and administrative expense would be $0.10 less per unit on this order than on normal sales.
Direct labor is a variable cost in this company.

90. Suppose there is ample idle capacity to produce the units required by the overseas
customer and the special discounted price on the special order is $41.60 per unit. By how
much would this special order increase (decrease) the company's net operating income for the
month?
A. $2,000
B. $25,200
C. $(8,400)
D. $(18,800)

91. Suppose the company is already operating at capacity when the special order is received
from the overseas customer. What would be the opportunity cost of each unit delivered to the
overseas customer?
A. $5.40
B. $5.30
C. $9.50
D. $22.00

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Chapter 12 - Differential Analysis: The Key to Decision Making

92. Suppose there is not enough idle capacity to produce all of the units for the overseas
customer and accepting the special order would require cutting back on production of 200
units for regular customers. The minimum acceptable price per unit for the special order is
closest to:
A. $38.80
B. $31.20
C. $51.10
D. $45.80

The Varone Company makes a single product called a Hom. The company has the capacity to
produce 40,000 Homs per year. Per unit costs to produce and sell one Hom at that activity
level are:

The regular selling price for one Hom is $60. A special order has been received at Varone
from the Fairview Company to purchase 8,000 Homs next year at 15% off the regular selling
price. If this special order were accepted, the variable selling expense would be reduced by
25%. However, Varone would have to purchase a specialized machine to engrave the
Fairview name on each Hom in the special order. This machine would cost $12,000 and it
would have no use after the special order was filled. The total fixed costs, both manufacturing
and selling, are constant within the relevant range of 30,000 to 40,000 Homs per year.
Assume direct labor is a variable cost.

93. If Varone can expect to sell 32,000 Homs next year through regular channels and the
special order is accepted at 15% off the regular selling price, the effect on net operating
income next year due to accepting this order would be a:
A. $52,000 increase
B. $80,000 increase
C. $24,000 decrease
D. $68,000 increase

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Chapter 12 - Differential Analysis: The Key to Decision Making

94. If Varone can expect to sell 32,000 Homs next year through regular channels, at what
special order price from Fairview should Varone be economically indifferent between either
accepting or not accepting this special order?
A. $51.00
B. $48.20
C. $42.50
D. $39.60

95. If Varone has an opportunity to sell 37,960 Homs next year through regular channels and
the special order is accepted for 15% off the regular selling price, the effect on net operating
income next year due to accepting this order would be a:
A. $33,320 decrease
B. $33,320 increase
C. $35,480 decrease
D. $35,480 increase

The Immanuel Company has just obtained a request for a special order of 6,000 jigs to be
shipped at the end of the month at a selling price of $7 each. The company has a production
capacity of 90,000 jigs per month with total fixed production costs of $144,000. At present,
the company is selling 80,000 jigs per month through regular channels at a selling price of
$11 each. For these regular sales, the cost for one jig is:

If the special order is accepted, Immanuel will not incur any selling expense; however, it will
incur shipping costs of $0.30 per unit. Total fixed production cost would not be affected by
this order.

96. If Immanuel accepts this special order, the change in monthly net operating income will
be a:
A. $12,600 increase
B. $14,400 increase
C. $3,600 increase
D. $1,800 increase

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Chapter 12 - Differential Analysis: The Key to Decision Making

97. At what selling price per unit should Immanuel be indifferent between accepting or
rejecting the special offer?
A. $7.40
B. $7.70
C. $6.40
D. $4.90

98. Suppose that regular sales of jigs total 85,000 units per month. All other conditions remain
the same. If Immanuel accepts the special order, the change in monthly net operating income
will be:
A. $14,400 increase
B. $7,200 increase
C. $3,600 decrease
D. $5,400 decrease

Mckerchie Inc. manufactures industrial components. One of its products, which is used in the
construction of industrial air conditioners, is known as G62. Data concerning this product are
given below:

The above per unit data are based on annual production of 9,000 units of the component.
Direct labor can be considered to be a variable cost.

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Chapter 12 - Differential Analysis: The Key to Decision Making

99. The company has received a special, one-time-only order for 300 units of component G62.
There would be no variable selling expense on this special order and the total fixed
manufacturing overhead and fixed selling and administrative expenses of the company would
not be affected by the order. Assuming that Mckerchie has excess capacity and can fill the
order without cutting back on the production of any product, what is the minimum price per
unit on the special order below which the company should not go?
A. $26
B. $67
C. $55
D. $160

100. The company has received a special, one-time-only order for 300 units of component
G62. There would be no variable selling expense on this special order and the total fixed
manufacturing overhead and fixed selling and administrative expenses of the company would
not be affected by the order. However, assume that Mckerchie has no excess capacity and this
special order would require 50 minutes of the constraining resource, which could be used
instead to produce products with a total contribution margin of $6,900. What is the minimum
price per unit on the special order below which the company should not go?
A. $90
B. $23
C. $49
D. $78

101. Refer to the original data in the problem. What is the current contribution margin per unit
for component G62 based on its selling price of $160 and its annual production of 9,000
units?
A. $28
B. $134
C. $93
D. $132

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Chapter 12 - Differential Analysis: The Key to Decision Making

The constraint at Dalbey Corporation is time on a particular machine. The company makes
three products that use this machine. Data concerning those products appear below:

102. Rank the products in order of their current profitability from most profitable to least
profitable. In other words, rank the products in the order in which they should be emphasized.
A. WP, FE, MB
B. FE, WP, MB
C. FE, MB, WP
D. MB, FE, WP

103. 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 this constrained resource?
A. $12.50 per minute
B. $29.96 per unit
C. $10.70 per minute
D. $71.92 per unit

Marrin Corporation makes three products that use the current constraint-a particular type of
machine. Data concerning those products appear below:

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Chapter 12 - Differential Analysis: The Key to Decision Making

104. Rank the products in order of their current profitability from most profitable to least
profitable. In other words, rank the products in the order in which they should be emphasized.
A. KZ, XB, ZP
B. ZP, KZ, XB
C. XB, ZP, KZ
D. KZ, ZP, XB

105. 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?
A. $14.30 per minute
B. $14.80 per minute
C. $33.81 per unit
D. $118.69 per unit

Cress Company 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
11,500 minutes are available per month on these machines.

106. How many minutes of milling machine time would be required to satisfy demand for all
four products?
A. 12,000
B. 10,800
C. 9,000
D. 11,500

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Chapter 12 - Differential Analysis: The Key to Decision Making

107. Which product makes the LEAST profitable use of the milling machines?
A. Product A
B. Product B
C. Product C
D. Product D

108. Which product makes the MOST profitable use of the milling machines?
A. Product A
B. Product B
C. Product C
D. Product D

109. Up to how much should the company be willing to pay for one additional minute of
milling machine time if the company has made the best use of the existing milling machine
capacity? (Round off to the nearest whole cent.)
A. $7.46
B. $15.20
C. $19.40
D. $0.00

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Chapter 12 - Differential Analysis: The Key to Decision Making

Broze Company 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
53,600 minutes are available per month on these machines.
Direct labor is a variable cost in this company.

110. How many minutes of grinding machine time would be required to satisfy demand for all
four products?
A. 56,100
B. 40,900
C. 53,600
D. 13,000

111. Which product makes the LEAST profitable use of the grinding machines?
A. Product A
B. Product B
C. Product C
D. Product D

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Chapter 12 - Differential Analysis: The Key to Decision Making

112. Which product makes the MOST profitable use of the grinding machines?
A. Product A
B. Product B
C. Product C
D. Product D

113. 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 off to the nearest whole cent.)
A. $35.90
B. $0.00
C. $8.58
D. $11.60

Dunford Company produces three products with the following costs and selling prices:

114. If Dunford has a limit of 20,000 direct labor hours but no limit on units sold or machine
hours, then the ranking of the products from the most profitable to the least profitable use of
the constrained resource is:
A. X, Y, Z
B. Y, Z, X
C. X, Z, Y
D. Z, Y, X

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Chapter 12 - Differential Analysis: The Key to Decision Making

115. If Dunford has a limit of 30,000 machine hours but no limit on units sold or direct labor
hours, then the ranking of the products from the most profitable to the least profitable use of
the constrained resource is:
A. Y, Z, X
B. X, Y, Z
C. X, Z, Y
D. Z, X, Y

Sohr Corporation processes sugar beets that it purchases from farmers. Sugar beets are
processed in batches. A batch of sugar beets costs $50 to buy from farmers and $15 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 $20 or processed further for $19 to make
the end product industrial fiber that is sold for $58. The beet juice can be sold as is for $41 or
processed further for $23 to make the end product refined sugar that is sold for $58.

116. How much profit (loss) does the company make by processing one batch of sugar beets
into the end products industrial fiber and refined sugar?
A. $(107)
B. $(4)
C. $9
D. $13

117. How much profit (loss) does the company make by processing the intermediate product
beet juice into refined sugar rather than selling it as is?
A. $(71)
B. $(6)
C. $(39)
D. $(21)

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Chapter 12 - Differential Analysis: The Key to Decision Making

118. Which of the intermediate products should be processed further?


A. beet fiber should NOT be processed into industrial fiber; beet juice should be processed
into refined sugar
B. beet fiber should NOT be processed into industrial fiber; beet juice should NOT be
processed into refined sugar
C. beet fiber should be processed into industrial fiber; beet juice should be processed into
refined sugar
D. beet fiber should be processed into industrial fiber; beet juice should NOT be processed
into refined sugar

Resendes Refiners, Inc., processes sugar cane that it purchases from farmers. Sugar cane is
processed in batches. A batch of sugar cane costs $48 to buy from farmers and $16 to crush in
the company's plant. Two intermediate products, cane fiber and cane juice, emerge from the
crushing process. The cane fiber can be sold as is for $24 or processed further for $17 to make
the end product industrial fiber that is sold for $38. The cane juice can be sold as is for $34 or
processed further for $23 to make the end product molasses that is sold for $76.

119. How much profit (loss) does the company make by processing one batch of sugar cane
into the end products industrial fiber and molasses?
A. $16
B. $(104)
C. $(6)
D. $10

120. How much profit (loss) does the company make by processing the intermediate product
cane juice into molasses rather than selling it as is?
A. $3
B. $19
C. $(45)
D. $(13)

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Chapter 12 - Differential Analysis: The Key to Decision Making

121. Which of the intermediate products should be processed further?


A. Cane fiber should NOT be processed into industrial fiber; Cane juice should be processed
into molasses
B. Cane fiber should be processed into industrial fiber; Cane juice should be processed into
molasses
C. Cane fiber should NOT be processed into industrial fiber; Cane juice should NOT be
processed into molasses
D. Cane fiber should be processed into industrial fiber; Cane juice should NOT be processed
into molasses

Dodrill 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 splitoff point or processed further. Data concerning these products appear below:

122. What is the net monetary advantage (disadvantage) of processing Product X beyond the
split-off point?
A. $26,800
B. $7,000
C. $4,800
D. $29,000

123. What is the net monetary advantage (disadvantage) of processing Product Y beyond the
split-off point?
A. $(4,200)
B. $21,800
C. $24,400
D. $(1,600)

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Chapter 12 - Differential Analysis: The Key to Decision Making

124. What is the minimum amount the company should accept for Product X if it is to be sold
at the split-off point?
A. $26,800
B. $19,800
C. $52,200
D. $45,200

Payne Company makes two products, M and N, in a joint process. At the split-off point,
40,000 units of M and 50,000 units of N are available each month. Monthly joint production
costs are $270,000.
Product M can be sold at the split-off point for $4.20 per unit. Product N can either be sold at
the split-off point for $3.20 per unit or it can be processed further and sold for $6.30 per unit.
If N is processed further, additional processing costs of $2.50 per unit will be incurred.

125. If N is processed further and then sold, rather than being sold at the split-off point, the
change in monthly operating income would be a:
A. $30,000 increase
B. $315,000 increase
C. $155,000 increase
D. $125,000 decrease

126. What would the selling price per unit of product N need to be after further processing in
order for Payne Company to be economically indifferent between selling N at the split-off
point or processing N further?
A. $8.70
B. $6.70
C. $7.20
D. $5.70

Essay Questions

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Chapter 12 - Differential Analysis: The Key to Decision Making

127. Marcell 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?

128. Costs associated with two alternatives, code-named Q and R, being considered by
Corniel 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?

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Chapter 12 - Differential Analysis: The Key to Decision Making

129. The management of Therriault Corporation is considering dropping product U51Y. 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 $280,000 of the fixed manufacturing expenses
and $140,000 of the fixed selling and administrative expenses are avoidable if product U51Y
is discontinued.
Required:
What would be the effect on the company's overall net operating income if product U51Y
were dropped? Should the product be dropped? Show your work!

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Chapter 12 - Differential Analysis: The Key to Decision Making

130. Nutall Corporation is considering dropping product N28X. 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 $199,000 of the fixed manufacturing expenses
and $114,000 of the fixed selling and administrative expenses are avoidable if product N28X
is discontinued.
Required:
a. According to the company's accounting system, what is the net operating income earned by
product N28X? Show your work!
b. What would be the effect on the company's overall net operating income of dropping
product N28X? Should the product be dropped? Show your work!

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Chapter 12 - Differential Analysis: The Key to Decision Making

131. The management of Rodarmel Corporation is considering dropping product G91Q. 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 $57,000 of the fixed manufacturing expenses
and $40,000 of the fixed selling and administrative expenses are avoidable if product G91Q is
discontinued.
Required:
a. What is the net operating income earned by product G91Q according to the company's
accounting system? Show your work!
b. What would be the effect on the company's overall net operating income of dropping
product G91Q? Should the product be dropped? Show your work!

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Chapter 12 - Differential Analysis: The Key to Decision Making

132. Mr. Earl Pearl, accountant for Margie Knall Co., Inc., has prepared the following
product-line income data:

The following additional information is available:


* The factory rent of $1,500 assigned to Product C is avoidable if the product were dropped.
* The company's total depreciation would not be affected by dropping C.
* Eliminating Product C will reduce the monthly utility bill from $1,500 to $800.
* All supervisors' salaries are avoidable.
* If Product C is discontinued, the maintenance department will be able to reduce monthly
expenses from $3,000 to $2,000.
* Elimination of Product C will make it possible to cut two persons from the administrative
staff; their combined salaries total $3,000.
Required:
Prepare an analysis showing whether Product C should be eliminated.

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Chapter 12 - Differential Analysis: The Key to Decision Making

133. The Hayes Company manufactures and sells several products, one of which is called a
slip differential. The company normally sells 30,000 units of the slip differential each month.
At this activity level, unit costs are:

An outside supplier has offered to produce the slip differentials for the Hayes Company, and
to ship them directly to the Hayes Company's customers. This arrangement would permit the
Hayes Company to reduce its variable selling expenses by one third (due to elimination of
freight costs). The facilities now being used to produce the slip differentials would be idle and
fixed manufacturing overhead would continue at 60 percent of its present level. The total
fixed selling expenses of the company would be unaffected by this decision.
Required:
What is the maximum acceptable price quotation for the slip differentials from the outside
supplier?

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Chapter 12 - Differential Analysis: The Key to Decision Making

134. Bady Inc. makes a range of products. The company's predetermined overhead rate is $14
per direct labor-hour, which was calculated using the following budgeted data:

Component M3 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 M3 for $108 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. Bady chronically has idle capacity.
Required:
Is the offer from the outside supplier financially attractive? Why?

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Chapter 12 - Differential Analysis: The Key to Decision Making

135. Kramer Company makes 4,000 units per year of a part called an axial tap for use in one
of its products. Data concerning the unit production costs of the axial tap follow:

An outside supplier has offered to sell Kramer Company all of the axial taps it requires. If
Kramer Company decided to discontinue making the axial taps, 40% of the above fixed
manufacturing overhead costs could be avoided. Assume that direct labor is a variable cost.
Required:
a. Assume Kramer Company has no alternative use for the facilities presently devoted to
production of the axial taps. If the outside supplier offers to sell the axial taps for $65 each,
should Kramer Company accept the offer? Fully support your answer with appropriate
calculations.
b. Assume that Kramer Company could use the facilities presently devoted to production of
the axial taps to expand production of another product that would yield an additional
contribution margin of $80,000 annually. What is the maximum price Kramer Company
should be willing to pay the outside supplier for axial taps?

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Chapter 12 - Differential Analysis: The Key to Decision Making

136. Masse Corporation uses part G18 in one of its products. The company's Accounting
Department reports the following costs of producing the 16,000 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 $28.00 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 $22,000
of these allocated general overhead costs would be avoided. In addition, the space used to
produce part G18 could be used to make more of one of the company's other products,
generating an additional segment margin of $22,000 per year for that product.
Required:
a. Prepare a report that shows the effect on the company's total net operating income of
buying part G18 from the supplier rather than continuing to make it inside the company.
b. Which alternative should the company choose?

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Chapter 12 - Differential Analysis: The Key to Decision Making

137. Part E43 is used in one of Ran Corporation's products. The company's Accounting
Department reports the following costs of producing the 12,000 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 $14.70 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 $5,000 of
these allocated general overhead costs would be avoided.
Required:
a. Prepare a report that shows the effect on the company's total net operating income of
buying part E43 from the supplier rather than continuing to make it inside the company.
b. Which alternative should the company choose?

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Chapter 12 - Differential Analysis: The Key to Decision Making

138. Foulds Company makes 10,000 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 $42.30 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 $39,000 per year.
If the part were purchased from the outside supplier, all of the direct labor cost of the part
would be avoided. However, $6.40 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.
Required:
a. How much of the unit product cost of $47.90 is relevant in the decision of whether to make
or buy the part?
b. What is the net total dollar advantage (disadvantage) of purchasing the part rather than
making it?
c. 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 10,000 units required each year?

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Chapter 12 - Differential Analysis: The Key to Decision Making

139. Jerston Company has an annual plant capacity of 3,000 units. Data concerning this
product are given below:

The company has received a special order for 500 units at a selling price of $45 each. Regular
sales would not be affected, and sales commissions on the 500 units would be reduced by onethird. This special order would have no impact on total fixed costs.
Required:
Determine whether the company should accept the special order. Show all computations.

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140. Nowlan Co. manufactures and sells trophies for winners of athletic and other events. Its
manufacturing plant has the capacity to produce 11,000 trophies each month; current monthly
production is 8,800 trophies. The company normally charges $87 per trophy. Cost data for the
current level of production are shown below:

The company has just received a special one-time order for 500 trophies at $50 each. For this
particular order, no variable selling and administrative costs would be incurred. This order
would also have no effect on fixed costs.
Required:
Should the company accept this special order? Why?

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Chapter 12 - Differential Analysis: The Key to Decision Making

141. Holtrop Corporation has received a request for a special order of 9,000 units of product
Z74 for $46.50 each. The normal selling price of this product is $51.60 each, but the units
would need to be modified slightly for the customer. The normal unit product cost of product
Z74 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 Z74 that would increase the variable costs by $6.20 per unit and that would require a
one-time investment of $46,000 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 effect on the company's total net operating income of accepting the special
order. Show your work!

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Chapter 12 - Differential Analysis: The Key to Decision Making

142. Rothery Co. manufactures and sells medals for winners of athletic and other events. Its
manufacturing plant has the capacity to produce 18,000 medals each month; current monthly
production is 17,100 medals. The company normally charges $88 per medal. Cost data for the
current level of production are shown below:

The company has just received a special one-time order for 600 medals at $73 each. For this
particular order, no variable selling and administrative costs would be incurred. This order
would also have no effect on fixed costs.
Required:
Should the company accept this special order? Why?

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Chapter 12 - Differential Analysis: The Key to Decision Making

143. Humes Corporation makes a range of products. The company's predetermined overhead
rate is $16 per direct labor-hour, which was calculated using the following budgeted data:

Management is considering a special order for 700 units of product J45K at $64 each. The
normal selling price of product J45K is $75 and the unit product cost is determined as
follows:

If the special order were accepted, normal sales of this and other products would not be
affected. The company has ample excess capacity to produce the additional units. 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 the special
order.
Required:
If the special order were accepted, what would be the impact on the company's overall profit?

12-73

Chapter 12 - Differential Analysis: The Key to Decision Making

144. A customer has asked Twiner Corporation to supply 5,000 units of product D05, with
some modifications, for $40.20 each. The normal selling price of this product is $52.80 each.
The normal unit product cost of product D05 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 D05 that would increase the variable costs by $3.50 per unit and that would require a
one-time investment of $23,000 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 effect on the company's total net operating income of accepting the special
order. Show your work!

12-74

Chapter 12 - Differential Analysis: The Key to Decision Making

145. Jumonville Company produces a single product. The cost of producing and selling a
single unit of this product at the company's normal activity level of 70,000 units per month is
as follows:

The normal selling price of the product is $56.70 per unit.


An order has been received from an overseas customer for 2,000 units to be delivered this
month at a special discounted price. This order would have no effect on the company's normal
sales and would not change the total amount of the company's fixed costs. The variable selling
and administrative expense would be $0.70 less per unit on this order than on normal sales.
Direct labor is a variable cost in this company.
Required:
a. Suppose there is ample idle capacity to produce the units required by the overseas customer
and the special discounted price on the special order is $51.20 per unit. By how much would
this special order increase (decrease) the company's net operating income for the month?
b. Suppose the company is already operating at capacity when the special order is received
from the overseas customer. What would be the opportunity cost of each unit delivered to the
overseas customer?
c. Suppose there is not enough idle capacity to produce all of the units for the overseas
customer and accepting the special order would require cutting back on production of 700
units for regular customers. What would be the minimum acceptable price per unit for the
special order?

12-75

Chapter 12 - Differential Analysis: The Key to Decision Making

146. Block Corporation makes three products that use the current constraint, which is a
particular type of machine. Data concerning those products appear below:

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?

12-76

Chapter 12 - Differential Analysis: The Key to Decision Making

147. Redner, Inc. 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 grinding
machine is the constraint, with only 2,400 minutes of grinding machine time available this
week.
Required:
a. Given the grinding machine constraint, which product should be emphasized? Support your
answer with appropriate calculations.
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 grinding machine time?

12-77

Chapter 12 - Differential Analysis: The Key to Decision Making

148. Glunn 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
24,200 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.)

12-78

Chapter 12 - Differential Analysis: The Key to Decision Making

149. Holvey 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 6,300
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.)

12-79

Chapter 12 - Differential Analysis: The Key to Decision Making

150. The constraint at Vrana 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?

12-80

Chapter 12 - Differential Analysis: The Key to Decision Making

151. Prevatte 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 $45 to buy from
farmers and $11 to peel in the company's plant. The peels produced from a batch can be sold
as is for animal feed for $27 or processed further for $16 to make the cocktail of nutrients that
are sold for $47. The depeeled spuds can be sold as is for $38 or processed further for $27 to
make frozen french fries that are sold for $59.
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? Show your work!
b. Should each of the intermediate products, peels and depeeled spuds, be sold as is or
processed further into an end product? Explain.

12-81

Chapter 12 - Differential Analysis: The Key to Decision Making

152. Spurrier Corporation produces two intermediate products, A and B, from a common
input. Intermediate product A can be further processed into end product X. Intermediate
product B can be further processed into end product Y. The common input is purchased in
batches that cost $50 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 $28 or processed further for $18
to make end product X that is sold for $43. Intermediate product B can be sold as is for $31 or
processed further for $24 to make end product Y that is sold for $68.
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 the common input
into the end products X and Y? Show your work!
b. Should each of the intermediate products, A and B, be sold as is or processed further into
an end product? Explain.

12-82

Chapter 12 - Differential Analysis: The Key to Decision Making

153. Harris Corp. manufactures three products from a common input in a joint processing
operation. Joint processing costs up to the split-off point total $200,000 per year. The
company allocates these costs to the joint products on the basis of their total sales value at the
split-off point.
Each product may be sold at the split-off point or processed further. The additional processing
costs and sales value after further processing for each product (on an annual basis) are:

The "Further Processing Costs" consist of variable and avoidable fixed costs.
Required:
Which product or products should be sold at the split-off point, and which product or products
should be processed further? Show computations.

12-83

Chapter 12 - Differential Analysis: The Key to Decision Making

154. Iaukea Company makes two products from a common input. Joint processing costs up to
the split-off point total $49,600 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:

Required:
a. What is the net monetary advantage (disadvantage) of processing Product X beyond the
split-off point?
b. What is the net monetary 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?

12-84

Chapter 12 - Differential Analysis: The Key to Decision Making

Chapter 12 Differential Analysis: The Key to Decision Making Answer Key

True / False Questions

1. Future costs that do not differ among the alternatives are not relevant in a decision.
TRUE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Knowledge
Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision
Level: Easy

2. Fixed costs are irrelevant in a decision.


FALSE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Comprehension
Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision
Level: Medium

3. Sunk costs are considered to be avoidable costs.


FALSE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Knowledge
Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision
Level: Easy

12-85

Chapter 12 - Differential Analysis: The Key to Decision Making

4. Avoidable costs are also called relevant costs.


TRUE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Knowledge
Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision
Level: Easy

5. An avoidable cost is a cost that can be eliminated (in whole or in part) as a result of
choosing one alternative over another.
TRUE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Knowledge
Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision
Level: Easy

6. A sunk cost is a cost that has already been incurred and that cannot be avoided regardless of
what action is chosen.
TRUE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Knowledge
Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision
Level: Easy

7. The book value of a machine, as shown on the balance sheet, is relevant in a decision
concerning the replacement of that machine by another machine.
FALSE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Comprehension
Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision
Level: Medium

12-86

Chapter 12 - Differential Analysis: The Key to Decision Making

8. If by dropping a product a firm can avoid more in fixed costs than it loses in contribution
margin, then the firm is better off economically if the product is dropped.
TRUE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Knowledge
Learning Objective: 12-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped
Level: Easy

12-87

Chapter 12 - Differential Analysis: The Key to Decision Making

9. Generally, a product line should be dropped when the fixed costs that can be avoided by
dropping the product line are less than the contribution margin that will be lost.
FALSE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Comprehension
Learning Objective: 12-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped
Level: Medium

10. The cost of a resource that has no alternative use in a make or buy decision problem has
an opportunity cost of zero.
TRUE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Knowledge
Learning Objective: 12-03 Prepare a make or buy analysis
Level: Easy

11. Vertical integration is the involvement by a company in more than one of the steps from
securing basic raw materials to the production and distribution of a finished product.
TRUE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Knowledge
Learning Objective: 12-03 Prepare a make or buy analysis
Level: Easy

12-88

Chapter 12 - Differential Analysis: The Key to Decision Making

12. Depreciation expense on existing factory equipment is generally relevant to a decision of


whether to accept or reject a special offer for a company's product.
FALSE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Comprehension
Learning Objective: 12-04 Prepare an analysis showing whether a special order should be accepted
Level: Medium

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

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Knowledge
Learning Objective: 12-05 Determine the most profitable use of a constrained resource
Level: Easy

14. Managers should not authorize working overtime at a work station that contains a
bottleneck.
FALSE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Comprehension
Learning Objective: 12-06 Determine the value of obtaining more of the constrained resource
Level: Medium

15. Joint costs are not relevant to the decision to sell a product at the split-off point or to
process the product further.
TRUE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Comprehension
Learning Objective: 12-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further
Level: Medium

12-89

Chapter 12 - Differential Analysis: The Key to Decision Making

16. Joint production costs are relevant costs in decisions about what to do with a product from
the split-off point onward in the production process.
FALSE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Comprehension
Learning Objective: 12-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further
Level: Medium

12-90

Chapter 12 - Differential Analysis: The Key to Decision Making

Multiple Choice Questions

17. Costs which are always relevant in decision making are those costs which are:
A. variable.
B. avoidable.
C. sunk.
D. fixed.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Knowledge
Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision
Level: Easy

18. A general rule in relevant cost analysis is:


A. variable costs are always relevant.
B. fixed costs are always irrelevant.
C. differential future costs and revenues are always relevant.
D. depreciation is always irrelevant.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Knowledge
Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision
Level: Easy

19. The opportunity cost of making a component part in a factory with no excess capacity is
the:
A. variable manufacturing cost of the component.
B. fixed manufacturing cost of the component.
C. total manufacturing cost of the component.
D. net benefit foregone from the best alternative use of the capacity required.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Comprehension
Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision
Level: Medium
Source: CMA, adapted

12-91

Chapter 12 - Differential Analysis: The Key to Decision Making

20. Freestone Company is considering renting Machine Y to replace Machine X. It is


expected that Y will waste less direct materials than does X. If Y is rented, X will be sold on
the open market. For this decision, which of the following factors is (are) relevant?
I. Cost of direct materials used
II. Resale value of Machine X
A. Only I
B. Only II
C. Both I and II
D. Neither I nor II

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Knowledge
Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision
Level: Easy

21. Which of the following are valid reasons for eliminating a product line?
I. The product line's contribution margin is negative.
II. The product line's traceable fixed costs plus its allocated common corporate costs are less
than its contribution margin.
A. Only I
B. Only II
C. Both I and II
D. Neither I nor II

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Knowledge
Learning Objective: 12-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped
Level: Easy

12-92

Chapter 12 - Differential Analysis: The Key to Decision Making

22. When there is a production constraint, a company should emphasize the products with:
A. the highest unit contribution margins.
B. the highest contribution margin ratios.
C. the highest contribution margin per unit of the constrained resource.
D. the highest contribution margins and contribution margin ratios.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Comprehension
Learning Objective: 12-05 Determine the most profitable use of a constrained resource
Level: Medium

23. In a sell or process further decision, which of the following costs are relevant?
I. A variable production cost incurred prior to the split-off point.
II. An avoidable fixed production cost incurred after the split-off point.
A. Only I.
B. Only II.
C. Both I and II.
D. Neither I nor II.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Comprehension
Learning Objective: 12-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further
Level: Medium

12-93

Chapter 12 - Differential Analysis: The Key to Decision Making

24. Scherer Corporation is preparing a bid for a special order that would require 720 liters of
material U48N. The company already has 560 liters of this raw material in stock that
originally cost $6.30 per liter. Material U48N 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 $5.80
per liter. New stocks of the material can be readily purchased for $6.65 per liter. What is the
relevant cost of the 720 liters of the raw material when deciding how much to bid on the
special order?
A. $4,592
B. $4,788
C. $4,456
D. $4,176
The relevant cost is the current market cost which is 720 liters current market $6.65 per
liter = $4,788.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision
Level: Hard
Source: CIMA, adapted

12-94

Chapter 12 - Differential Analysis: The Key to Decision Making

25. Cung Inc. has some material that originally cost $68,400. The material has a scrap value
of $30,100 as is, but if reworked at a cost of $1,400, it could be sold for $30,800. What would
be the incremental effect on the company's overall profit of reworking and selling the material
rather than selling it as is as scrap?
A. -$69,100
B. -$700
C. $29,400
D. -$39,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision
Level: Medium
Source: CIMA, adapted

12-95

Chapter 12 - Differential Analysis: The Key to Decision Making

26. Liffick Corporation is a specialty component manufacturer with idle capacity.


Management would like to use its extra capacity to generate additional profits. A potential
customer has offered to buy 6,200 units of component VFG. Each unit of VFG requires 8
units of material C79 and 6 units of material X70. Data concerning these two materials
follow:

Material C79 is in use in many of the company's products and is routinely replenished.
Material X70 is no longer used by the company in any of its normal products and existing
stocks would not be replenished once they are used up.
What would be the relevant cost of the materials, in total, for purposes of determining a
minimum acceptable price for the order for product VFG?
A. $528,551
B. $523,280
C. $476,350
D. $484,455
Materials requirements for C79: 6,200 units of VFG 8 units of C79 per unit of VFG =
49,600 units of C79
Materials requirements for X70: 6,200 units of VFG 6 units of X70 per unit of VFG =
37,200 units of X70

* 37,200 units - 31,060 units = 6,140 units

12-96

Chapter 12 - Differential Analysis: The Key to Decision Making


AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision
Level: Hard
Source: CIMA, adapted

27. Schemm Inc. regularly uses material F04E and currently has in stock 460 liters of the
material for which it paid $2,622 several weeks ago. If this were to be sold as is on the open
market as surplus material, it would fetch $5.25 per liter. New stocks of the material can be
purchased on the open market for $5.85 per liter, but it must be purchased in lots of 1,000
liters. You have been asked to determine the relevant cost of 800 liters of the material to be
used in a job for a customer. The relevant cost of the 800 liters of material F04E is:
A. $5,850
B. $4,200
C. $4,404
D. $4,680
The relevant cost is the current market value: 800 liters current market $5.85 per liter =
$4,680

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision
Level: Hard
Source: CIMA, adapted

12-97

Chapter 12 - Differential Analysis: The Key to Decision Making

28. Stampka Corporation is a specialty component manufacturer with idle capacity.


Management would like to use its extra capacity to generate additional profits. A potential
customer has offered to buy 4,200 units of component JJF. Each unit of JJF requires 6 units of
material O38 and 9 units of material P56. Data concerning these two materials follow:

Material O38 is in use in many of the company's products and is routinely replenished.
Material P56 is no longer used by the company in any of its normal products and existing
stocks would not be replenished once they are used up.
What would be the relevant cost of the materials, in total, for purposes of determining a
minimum acceptable price for the order for product JJF?
A. $146,790
B. $199,080
C. $155,610
D. $212,340
Materials requirements for O38: 4,200 units of JJF 6 units of O38 per unit of JJF = 25,200
units of O38
Materials requirements for P56: 4,200 units of JJF 9 units of P56 per unit of JJF = 37,800
units of P56

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision
Level: Hard
Source: CIMA, adapted

12-98

Chapter 12 - Differential Analysis: The Key to Decision Making

29. Janus Corporation has in stock 43,700 kilograms of material L that it bought five years
ago for $6.10 per kilogram. This raw material was purchased to use in a product line that has
been discontinued. Material L can be sold as is for scrap for $3.23 per kilogram. An
alternative would be to use material L in one of the company's current products, E99D, which
currently requires 2 kilograms of a raw material that is available for $9.45 per kilogram.
Material L can be modified at a cost of $0.62 per kilogram so that it can be used as a
substitute for this material in the production of product E99D. However, after modification, 3
kilograms of material L is required for every unit of product E99D that is produced. Janus
Corporation has now received a request from a company that could use material L in its
production process. Assuming that Janus Corporation could use all of its stock of material L
to make product E99D or the company could sell all of its stock of the material at the current
scrap price of $3.23 per kilogram, what is the minimum acceptable selling price of material L
to the company that could use material L in its own production process?
A. $3.23
B. $5.68
C. $6.92
D. $2.45

The value of using material L to produce E99D is greater than its scrap value, so the company
would be giving up benefits of $5.68 per kilogram if it were to sell material L. Therefore, the
minimum acceptable price is $5.68 per kilogram.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision
Level: Hard
Source: CIMA, adapted

12-99

Chapter 12 - Differential Analysis: The Key to Decision Making

30. Lampshire Inc. is considering using stocks of an old raw material in a special project. The
special project would require all 160 kilograms of the raw material that are in stock and that
originally cost the company $1,136 in total. If the company were to buy new supplies of this
raw material on the open market, it would cost $7.25 per kilogram. However, the company
has no other use for this raw material and would sell it at the discounted price of $6.50 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 $75 for all 160 kilograms. What is the relevant cost
of the 160 kilograms of the raw material when deciding whether to proceed with the special
project?
A. $1,040
B. $965
C. $1,136
D. $1,160
The company's relevant cost in this case is how much it could earn by selling the 160
kilograms at the discounted price of $6.50 per kilogram, less delivery costs of $75 for all 160
kilograms.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision
Level: Hard
Source: CIMA, adapted

12-100

Chapter 12 - Differential Analysis: The Key to Decision Making

31. A study has been conducted to determine if Product A should be dropped. Sales of the
product total $200,000 per year; variable expenses total $140,000 per year. Fixed expenses
charged to the product total $90,000 per year. The company estimates that $40,000 of these
fixed expenses will continue even if the product is dropped. These data indicate that if
Product A is dropped, the company's overall net operating income would:
A. decrease by $20,000 per year
B. increase by $20,000 per year
C. decrease by $10,000 per year
D. increase by $30,000 per year

Net operating income would decline by $10,000 if Product A were dropped.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped
Level: Easy

12-101

Chapter 12 - Differential Analysis: The Key to Decision Making

32. The Kelsh Company has two divisions--North and South. The divisions have the
following revenues and expenses:

Management at Kelsh is pondering the elimination of North Division. If North Division were
eliminated, its traceable fixed expenses could be avoided. The total common corporate
expenses would be unaffected. Given these data, the elimination of North Division would
result in an overall company net operating income of:
A. $100,000
B. $150,000
C. $(140,000)
D. $50,000

The company currently has a net operating income of $50,000the combined effect of the
apparent $50,000 loss in the North Division and the apparent $100,000 profit in the South
Division. Dropping the North Division would reduce net operating income by $190,000.
Therefore, after dropping the North Division, the overall company net operating loss would be
$140,000 (= $50,000 - $190,000).

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped
Level: Medium

12-102

Chapter 12 - Differential Analysis: The Key to Decision Making

33. Power Systems Inc. manufactures jet engines for the United States armed forces on a costplus basis. The production cost of a particular jet engine is shown below:

If production of this engine was discontinued, the production capacity would be idle, and the
supervisor would be laid off. The depreciation referred to above is for special equipment that
would have no resale value and that does not wear out through use. When asked to bid on the
next contract for this engine, the minimum unit price that Power Systems should bid is:
A. $408,000
B. $365,000
C. $397,000
D. $385,000
The relevant (avoidable) cost of producing an engine is:

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped
Level: Medium
Source: CMA, adapted

12-103

Chapter 12 - Differential Analysis: The Key to Decision Making

34. The management of Heider Corporation is considering dropping product J14V. Data from
the company's accounting system appear below:

In the company's accounting system all fixed expenses of the company are fully allocated to
products. Further investigation has revealed that $211,000 of the fixed manufacturing
expenses and $172,000 of the fixed selling and administrative expenses are avoidable if
product J14V is discontinued. What would be the effect on the company's overall net
operating income if product J14V were dropped?
A. Overall net operating income would decrease by $55,000.
B. Overall net operating income would increase by $160,000.
C. Overall net operating income would increase by $55,000.
D. Overall net operating income would decrease by $160,000.

Net operating income would decline by $160,000 if Product J14V were dropped. Therefore,
the product should not be dropped. Another way of saying this is that the company is actually
currently making $160,000 on this product.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped
Level: Easy

12-104

Chapter 12 - Differential Analysis: The Key to Decision Making

35. Product R19N has been considered a drag on profits at Buzzeo Corporation for some time
and management is considering discontinuing the product altogether. Data from the
company's accounting system appear below:

In the company's accounting system all fixed expenses of the company are fully allocated to
products. Further investigation has revealed that $49,000 of the fixed manufacturing expenses
and $30,000 of the fixed selling and administrative expenses are avoidable if product R19N is
discontinued. What would be the effect on the company's overall net operating income if
product R19N were dropped?
A. Overall net operating income would decrease by $59,000.
B. Overall net operating income would decrease by $22,000.
C. Overall net operating income would increase by $59,000.
D. Overall net operating income would increase by $22,000.

Net operating income would decline by $59,000 if Product R19N were dropped. Therefore,
the product should not be dropped. Another way of saying this is that the company is actually
currently making $59,000 on this product.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped
Level: Easy

12-105

Chapter 12 - Differential Analysis: The Key to Decision Making

36. Lusk Company produces and sells 15,000 units of Product A each month. The selling
price of Product A is $20 per unit, and variable expenses are $14 per unit. A study has been
made concerning whether Product A should be discontinued. The study shows that $70,000 of
the $100,000 in fixed expenses charged to Product A would continue even if the product was
discontinued. These data indicate that if Product A is discontinued, the company's overall net
operating income would:
A. decrease by $60,000 per month
B. increase by $10,000 per month
C. increase by $20,000 per month
D. decrease by $20,000 per month

Net operating income would decline by $60,000 if Product A were dropped. Therefore, the
product should not be dropped. Another way of saying this is that the company is actually
making $60,000 on this product.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped
Level: Easy

12-106

Chapter 12 - Differential Analysis: The Key to Decision Making

37. Peluso Company, a manufacturer of snowmobiles, is operating at 70% of plant capacity.


Peluso's plant manager is considering making the headlights now being purchased from an
outside supplier for $11 each. The Peluso plant has idle equipment that could be used to
manufacture the headlights. The design engineer estimates that each headlight requires $4 of
direct materials, $3 of direct labor, and $6.00 of manufacturing overhead. Forty percent of the
manufacturing overhead is a fixed cost that would be unaffected by this decision. A decision
by Peluso Company to manufacture the headlights should result in a net gain (loss) for each
headlight of:
A. $(2.00)
B. $1.60
C. $0.40
D. $2.80

It would cost the company $0.40 less to make the part than to buy it for $11.00.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-03 Prepare a make or buy analysis
Level: Medium
Source: CMA, adapted

12-107

Chapter 12 - Differential Analysis: The Key to Decision Making

38. Part I51 is used in one of Pries Corporation's products. The company makes 18,000 units
of this part each year. The company's Accounting Department reports the following costs of
producing the part at this level of activity:

An outside supplier has offered to produce this part and sell it to the company for $15.80
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 $26,000 of these allocated general overhead costs would be avoided.
If management decides to buy part I51 from the outside supplier rather than to continue
making the part, what would be the annual impact on the company's overall net operating
income?
A. Net operating income would decline by $81,800 per year.
B. Net operating income would decline by $55,800 per year.
C. Net operating income would decline by $119,800 per year.
D. Net operating income would decline by $29,800 per year.

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Chapter 12 - Differential Analysis: The Key to Decision Making

Net operating income would decline by $119,800 per year if the part were purchased rather
than made internally.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-03 Prepare a make or buy analysis
Level: Easy

12-109

Chapter 12 - Differential Analysis: The Key to Decision Making

39. Iwasaki Inc. is considering whether to continue to make a component or to buy it from an
outside supplier. The company uses 13,000 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 minute on the machine that is the company's current constraint. If the
component were bought, this machine time would be freed up for use on another product that
requires 2 minutes on this machine and that has a contribution margin of $5.20 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?
A. $22.40
B. $19.80
C. $17.28
D. $19.88

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-03 Prepare a make or buy analysis
Level: Hard
Source: CIMA, adapted

12-110

Chapter 12 - Differential Analysis: The Key to Decision Making

40. Part N29 is used by Farman Corporation to make one of its products. A total of 11,000
units of this part are produced and used every year. The company's Accounting Department
reports the following costs of producing the part at this level of activity:

An outside supplier has offered to make the part and sell it to the company for $21.20 each. If
this offer is accepted, the supervisor's salary and all of the variable costs, including the 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, none of which would be avoided if the part were purchased
instead of produced internally. In addition, the space used to make part N29 could be used to
make more of one of the company's other products, generating an additional segment margin
of $29,000 per year for that product. What would be the impact on the company's overall net
operating income of buying part N29 from the outside supplier?
A. Net operating income would decline by $38,900 per year.
B. Net operating income would increase by $29,000 per year.
C. Net operating income would decline by $32,600 per year.
D. Net operating income would increase by $19,100 per year.

Net operating income would decline by $32,600 per year if the part were purchased rather
than made internally.

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Chapter 12 - Differential Analysis: The Key to Decision Making


AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-03 Prepare a make or buy analysis
Level: Medium

12-112

Chapter 12 - Differential Analysis: The Key to Decision Making

41. Fillip Corporation makes 4,000 units of part U13 each year. This part is used in one of the
company's products. The company's Accounting Department reports the following costs of
producing the part at this level of activity:

An outside supplier has offered to make and sell the part to the company for $21.60 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 $3,000 of
these allocated general overhead costs would be avoided. In addition, the space used to
produce part U13 would be used to make more of one of the company's other products,
generating an additional segment margin of $13,000 per year for that product.
What would be the impact on the company's overall net operating income of buying part U13
from the outside supplier?
A. Net operating income would increase by $13,000 per year.
B. Net operating income would decline by $42,600 per year.
C. Net operating income would decline by $68,600 per year.
D. Net operating income would increase by $9,200 per year.

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Chapter 12 - Differential Analysis: The Key to Decision Making

Net operating income would increase by $9,200 per year if the part were bought from the
outside supplier.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-03 Prepare a make or buy analysis
Level: Medium

12-114

Chapter 12 - Differential Analysis: The Key to Decision Making

42. Ethridge Corporation is presently making part H25 that is used in one of its products. A
total of 9,000 units of this part are produced and used every year. The company's Accounting
Department reports the following costs of producing the part at this level of activity:

An outside supplier has offered to make and sell the part to the company for $15.40 each. If
this offer is accepted, the supervisor's salary and all of the variable costs 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, none of which would be avoided if the part were purchased instead of produced
internally. If management decides to buy part H25 from the outside supplier rather than to
continue making the part, what would be the annual impact on the company's overall net
operating income?
A. Net operating income would increase by $24,300 per year.
B. Net operating income would decline by $24,300 per year.
C. Net operating income would increase by $58,500 per year.
D. Net operating income would decline by $58,500 per year.

Net operating income would decline by $24,300 per year if the part were purchased from the
outside supplier.

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Chapter 12 - Differential Analysis: The Key to Decision Making


AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-03 Prepare a make or buy analysis
Level: Easy

43. Pitkin Company produces a part used in the manufacture of one of its products. The unit
product cost of the part is $33, computed as follows:

An outside supplier has offered to provide the annual requirement of 10,000 of the parts for
only $27 each. The company estimates that 30% of the fixed manufacturing overhead costs
above will continue if the parts are purchased from the outside supplier. Assume that direct
labor is an avoidable cost in this decision. Based on these data, the per unit dollar advantage
or disadvantage of purchasing the parts from the outside supplier would be:
A. $3 advantage
B. $1 advantage
C. $1 disadvantage
D. $4 disadvantage

Because the part could be purchased from the outside supplier for $27, but costs $30 to make
internally, purchasing the parts from the outside supplier would yield a $3 advantage.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-03 Prepare a make or buy analysis
Level: Easy

12-116

Chapter 12 - Differential Analysis: The Key to Decision Making

44. A customer has requested that Inga Corporation fill a special order for 2,000 units of
product K81 for $25.00 a unit. While the product would be modified slightly for the special
order, product K81's normal unit product cost is $19.90:

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
K81 that would increase the variable costs by $1.20 per unit and that would require an
investment of $10,000 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. If the special order is accepted, the company's
overall net operating income would increase (decrease) by:
A. $13,000
B. $(9,700)
C. $10,200
D. $(2,200)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-04 Prepare an analysis showing whether a special order should be accepted
Level: Easy

12-117

Chapter 12 - Differential Analysis: The Key to Decision Making

45. Rojo Corporation has received a request for a special order of 8,000 units of product W68
for $27.20 each. Product W68's unit product cost is $18.50, determined 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 modifications made to product
W68 that would increase the variable costs by $7.90 per unit and that would require an
investment of $31,000 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. If the special order is accepted, the company's
overall net operating income would increase (decrease) by:
A. $(4,400)
B. $69,600
C. $30,600
D. $(24,600)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-04 Prepare an analysis showing whether a special order should be accepted
Level: Easy

12-118

Chapter 12 - Differential Analysis: The Key to Decision Making

46. Ellis Television makes and sells portable televisions. Each television regularly sells for
$210. The following cost data per television is based on a full capacity of 10,000 televisions
produced each period.

A special order has been received by Ellis for a sale of 2,000 televisions to an overseas
customer. The only selling costs that would be incurred on this order would be $6 per
television for shipping. Ellis is now selling 6,000 televisions through regular channels each
period. What should be the minimum selling price per television in negotiating a price for this
special order?
A. $174
B. $168
C. $210
D. $180

The selling price should at least cover the variable cost of $174 per unit.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-04 Prepare an analysis showing whether a special order should be accepted
Level: Medium

12-119

Chapter 12 - Differential Analysis: The Key to Decision Making

47. An automated turning machine is the current constraint at Naik Corporation. Three
products use this constrained resource. Data concerning those products appear below:

Rank the products in order of their current profitability from most profitable to least
profitable. In other words, rank the products in the order in which they should be emphasized.
A. OP, KU, YY
B. YY, OP, KU
C. KU, YY, OP
D. YY, KU, OP

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-05 Determine the most profitable use of a constrained resource
Level: Easy

12-120

Chapter 12 - Differential Analysis: The Key to Decision Making

48. Pappan Corporation makes three products that use compound W, the current constrained
resource. Data concerning those products appear below:

Rank the products in order of their current profitability from most profitable to least
profitable. In other words, rank the products in the order in which they should be emphasized.
A. RH, GY, QF
B. GY, RH, QF
C. QF, GY, RH
D. RH, QF, GY

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-05 Determine the most profitable use of a constrained resource
Level: Easy

12-121

Chapter 12 - Differential Analysis: The Key to Decision Making

49. Consider the following production and cost data for two products, X and Y:

The company has 15,000 machine hours available each period, and there is unlimited demand
for each product. What is the largest possible total contribution margin that can be realized
each period?
A. $120,000
B. $125,000
C. $135,000
D. $150,000

Since there is unlimited demand for each product, all of the available capacity should be used
to produce Product Y.
Production of Product Y = 15,000 machine-hours 2 machine-hours per unit = 7,500 units
Total contribution margin = $18.00 per unit 7,500 units = $135,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-05 Determine the most profitable use of a constrained resource
Level: Hard

12-122

Chapter 12 - Differential Analysis: The Key to Decision Making

50. The constraint at Mcglathery 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?
A. $75.26 per unit
B. $38.94 per unit
C. $11.80 per minute
D. $15.20 per minute

The company should be willing to pay up to $11.80 per minute to produce more CR.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-06 Determine the value of obtaining more of the constrained resource
Level: Medium

12-123

Chapter 12 - Differential Analysis: The Key to Decision Making

51. Wright Company produces products I, J, and K from a single raw material input.
Budgeted data for the next month follows:

If the cost of the raw material input is $78,000, which of the products should be processed
beyond the split-off point?

A. Option A
B. Option B
C. Option C
D. Option D

Only Product I and Product K should be processed beyond the split-off point.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further
Level: Medium

12-124

Chapter 12 - Differential Analysis: The Key to Decision Making

52. Two products, IF and RI, emerge from a joint process. Product IF has been allocated
$25,300 of the total joint costs of $46,000. A total of 2,000 units of product IF are produced
from the joint process. Product IF can be sold at the split-off point for $11 per unit, or it can
be processed further for an additional total cost of $10,000 and then sold for $13 per unit. If
product IF is processed further and sold, what would be the effect on the overall profit of the
company compared with sale in its unprocessed form directly after the split-off point?
A. $31,300 less profit
B. $6,000 less profit
C. $16,000 more profit
D. $19,300 more profit

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further
Level: Medium
Source: CIMA, adapted

12-125

Chapter 12 - Differential Analysis: The Key to Decision Making

53. Coakley Beet Processors, Inc., processes sugar beets in batches. A batch of sugar beets
costs $48 to buy from farmers and $10 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 $24 or processed further for $16 to make the end product industrial fiber that is
sold for $36. The beet juice can be sold as is for $44 or processed further for $28 to make the
end product refined sugar that is sold for $70. How much profit (loss) does the company make
by processing the intermediate product beet juice into refined sugar rather than selling it as
is?
A. $(31)
B. $(60)
C. $(2)
D. $(12)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further
Level: Easy

12-126

Chapter 12 - Differential Analysis: The Key to Decision Making

54. Galluzzo Corporation processes sugar beets in batches. A batch of sugar beets costs $51 to
buy from farmers and $14 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 $20
or processed further for $18 to make the end product industrial fiber that is sold for $45. The
beet juice can be sold as is for $41 or processed further for $21 to make the end product
refined sugar that is sold for $62. How much profit (loss) does the company make by
processing one batch of sugar beets into the end products industrial fiber and refined sugar?
A. $(104)
B. $(4)
C. $7
D. $3

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further
Level: Easy

12-127

Chapter 12 - Differential Analysis: The Key to Decision Making

55. Beilke Corporation processes sugar beets in batches that it purchases from farmers for $53
a batch. A batch of sugar beets costs $12 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 $20 or processed further for $10 to make the end product industrial fiber that is
sold for $26. The beet juice can be sold as is for $30 or processed further for $29 to make the
end product refined sugar that is sold for $79. Which of the intermediate products should be
processed further?
A. beet fiber should be processed into industrial fiber; beet juice should be processed into
refined sugar
B. beet fiber should NOT be processed into industrial fiber; beet juice should be processed
into refined sugar
C. beet fiber should NOT be processed into industrial fiber; beet juice should NOT be
processed into refined sugar
D. beet fiber should be processed into industrial fiber; beet juice should NOT be processed
into refined sugar

Beet fiber should not be processed into industrial fiberit should be sold as is at the split-off
point. Beet juice should be processed into refined sugar.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further
Level: Easy

12-128

Chapter 12 - Differential Analysis: The Key to Decision Making

56. Zollars Cane Products, Inc., processes sugar cane in batches. The company buys a batch
of sugar cane from farmers for $70 which is then crushed in the company's plant at a cost of
$19. Two intermediate products, cane fiber and cane juice, emerge from the crushing process.
The cane fiber can be sold as is for $21 or processed further for $13 to make the end product
industrial fiber that is sold for $42. The cane juice can be sold as is for $44 or processed
further for $26 to make the end product molasses that is sold for $88. How much profit (loss)
does the company make by processing one batch of sugar cane into the end products industrial
fiber and molasses?
A. $26
B. $2
C. $(24)
D. $(128)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further
Level: Easy

12-129

Chapter 12 - Differential Analysis: The Key to Decision Making

57. Kempler Corporation processes sugar cane in batches. The company purchases a batch of
sugar cane for $34 from farmers and then crushes the cane in the company's plant at the cost
of $15. Two intermediate products, cane fiber and cane juice, emerge from the crushing
process. The cane fiber can be sold as is for $26 or processed further for $17 to make the end
product industrial fiber that is sold for $41. The cane juice can be sold as is for $32 or
processed further for $22 to make the end product molasses that is sold for $51. Which of the
intermediate products should be processed further?
A. Cane fiber should be processed into industrial fiber; Cane juice should be processed into
molasses
B. Cane fiber should NOT be processed into industrial fiber; Cane juice should NOT be
processed into molasses
C. Cane fiber should be processed into industrial fiber; Cane juice should NOT be processed
into molasses
D. Cane fiber should NOT be processed into industrial fiber; Cane juice should be processed
into molasses

Cane fiber should NOT be processed into industrial fiber and cane juice should NOT be
processed into molasses, both products should be sold as is without further processing.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further
Level: Easy

Two alternatives, code-named X and Y, are under consideration at Afalava Corporation.


Costs associated with the alternatives are listed below.

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Chapter 12 - Differential Analysis: The Key to Decision Making

58. Are the materials costs and processing costs relevant in the choice between alternatives X
and Y? (Ignore the equipment rental and occupancy costs in this question.)
A. Only materials costs are relevant
B. Only processing costs are relevant
C. Both materials costs and processing costs are relevant
D. Neither materials costs nor processing costs are relevant
The materials costs are not relevant because they do not differ between the alternatives. The
processing costs are relevant because they do differ between the alternatives.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision
Level: Easy

59. What is the differential cost of Alternative Y over Alternative X, including all of the
relevant costs?
A. $103,000
B. $39,000
C. $142,000
D. $122,500

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision
Level: Easy

12-131

Chapter 12 - Differential Analysis: The Key to Decision Making

Zurasky Corporation is considering two alternatives: A and B. Costs associated with the
alternatives are listed below:

60. Are the materials costs and processing costs relevant in the choice between alternatives A
and B? (Ignore the equipment rental and occupancy costs in this question.)
A. Neither materials costs nor processing costs are relevant
B. Only processing costs are relevant
C. Only materials costs are relevant
D. Both materials costs and processing costs are relevant
Materials costs are relevant because they differ between the alternatives. Processing costs are
not relevant because they do not differ between the alternatives.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision
Level: Easy

12-132

Chapter 12 - Differential Analysis: The Key to Decision Making

61. What is the differential cost of Alternative B over Alternative A, including all of the
relevant costs?
A. $44,000
B. $149,000
C. $105,000
D. $127,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision
Level: Easy

Austin Wool Products purchases raw wool and processes it into yarn. The spindles of yarn
can then be sold directly to stores or they can be used by Austin Wool Products to make
afghans. Each afghan requires one spindle of yarn. Current cost and revenue data for the
spindles of yarn and for the afghans are as follows:

Each month 4,000 spindles of yarn are produced that can either be sold outright or processed
into afghans.

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62. If Austin chooses to produce 4,000 afghans each month, the change in the monthly net
operating income as compared to selling 4,000 spindles of yarn is:
A. $24,000 decrease
B. $24,000 increase
C. $16,000 decrease
D. $16,000 increase

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision
Level: Medium

63. What is the lowest price Austin should be willing to accept for one afghan as long as it
can sell spindles of yarn to the outside market for $12 each?
A. $32
B. $30
C. $28
D. $26

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision
Level: Hard

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The Tingey Company has 500 obsolete microcomputers that are carried in inventory at a total
cost of $720,000. If these microcomputers are upgraded at a total cost of $100,000, they can
be sold for a total of $160,000. As an alternative, the microcomputers can be sold in their
present condition for $50,000.

64. The sunk cost in this situation is:


A. $720,000
B. $160,000
C. $50,000
D. $100,000
The value of the obsolete microcomputers in inventory, $720,000, is a sunk cost.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision
Level: Easy

65. What is the net advantage or disadvantage to the company from upgrading the computers
rather than selling them in their present condition?
A. $110,000 advantage
B. $660,000 disadvantage
C. $10,000 advantage
D. $60,000 advantage

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision
Level: Easy

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Chapter 12 - Differential Analysis: The Key to Decision Making

66. Suppose the selling price of the upgraded computers has not been set. At what selling
price per unit would the company be as well off upgrading the computers as if it just sold the
computers in their present condition?
A. $100
B. $770
C. $300
D. $210
The selling price of the upgraded computers would have to cover the opportunity cost of
$50,000 for selling the computers as is as well as the $100,000 cost of upgrading.
The point of indifference would be $150,000 500 computers = $300 per computer.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision
Level: Medium

The management of Fries Corporation has been concerned for some time with the financial
performance of its product R89H and has considered discontinuing it on several occasions.
Data from the company's accounting system appear below:

In the company's accounting system all fixed expenses of the company are fully allocated to
products. Further investigation has revealed that $31,000 of the fixed manufacturing expenses
and $46,000 of the fixed selling and administrative expenses are avoidable if product R89H is
discontinued.

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Chapter 12 - Differential Analysis: The Key to Decision Making

67. According to the company's accounting system, what is the net operating income earned
by product R89H?
A. $143,000
B. $8,000
C. $(8,000)
D. $(143,000)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped
Level: Easy

12-137

Chapter 12 - Differential Analysis: The Key to Decision Making

68. What would be the effect on the company's overall net operating income if product R89H
were dropped?
A. Overall net operating income would decrease by $66,000.
B. Overall net operating income would decrease by $8,000.
C. Overall net operating income would increase by $66,000.
D. Overall net operating income would increase by $8,000.

Overall net operating income would decrease by $66,000.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped
Level: Easy

The management of Freshwater Corporation is considering dropping product C11B. 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 $211,000 of the fixed manufacturing expenses
and $122,000 of the fixed selling and administrative expenses are avoidable if product C11B
is discontinued.

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Chapter 12 - Differential Analysis: The Key to Decision Making

69. According to the company's accounting system, what is the net operating income earned
by product C11B?
A. $74,000
B. $(521,000)
C. $(74,000)
D. $521,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped
Level: Easy

12-139

Chapter 12 - Differential Analysis: The Key to Decision Making

70. What would be the effect on the company's overall net operating income if product C11B
were dropped?
A. Overall net operating income would decrease by $188,000.
B. Overall net operating income would increase by $74,000.
C. Overall net operating income would decrease by $74,000.
D. Overall net operating income would increase by $188,000.

Overall net operating income would decrease by $188,000.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped
Level: Easy

12-140

Chapter 12 - Differential Analysis: The Key to Decision Making

The Western Company is considering the addition of a new product to its current product
lines. The expected cost and revenue data for the new product are as follows:

If the new product is added to the existing product line, then sales of existing products will
decline. As a consequence, the contribution margin of the other existing product lines is
expected to drop $78,000 per year.

71. If the new product is added next year, the increase in net operating income resulting from
this decision would be:
A. $387,000
B. $261,000
C. $183,000
D. $207,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped
Level: Hard

12-141

Chapter 12 - Differential Analysis: The Key to Decision Making

72. What is the lowest selling price per unit among those listed below that could be charged
for the new product and still make it economically desirable to add the new product?
A. $240
B. $222
C. $291
D. $249

The selling price would have to cover the total cost of $744,000. On a per unit basis, this
would be $744,000 3,000 units = $248 per unit. The lowest selling price that is listed that is
larger than $248 per unit is $249 per unit.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped
Level: Hard

12-142

Chapter 12 - Differential Analysis: The Key to Decision Making

Condensed monthly operating income data for Cosmo Inc. for November is presented below.
Additional information regarding Cosmo's operations follows the statement.

Three-quarters of each store's traceable fixed expenses are avoidable if the store were to be
closed.
Cosmo allocates common fixed expenses to each store on the basis of sales dollars.
Management estimates that closing the Town Store would result in a ten percent decrease in
Mall Store sales, while closing the Mall Store would not affect Town Store sales.
The operating results for November are representative of all months.

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Chapter 12 - Differential Analysis: The Key to Decision Making

73. A decision by Cosmo Inc. to close the Town Store would result in a monthly increase
(decrease) in Cosmo's operating income of:
A. $4,000
B. $(10,800)
C. $(800)
D. $(6,000)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped
Level: Hard
Source: CMA, adapted

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Chapter 12 - Differential Analysis: The Key to Decision Making

74. Cosmo is considering a promotional campaign at the Town Store that would not affect the
Mall Store. Increasing annual promotional expenses at the Town Store by $60,000 in order to
increase Town Store sales by ten percent would result in a monthly increase (decrease) in
Cosmo's operating income of:
A. $(16,800)
B. $3,400
C. $7,000
D. $(1,400)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped
Level: Hard
Source: CMA, adapted

The Cabinet Shoppe is considering the addition of a new line of kitchen cabinets to its current
product lines. Expected cost and revenue data for the new cabinets are as follows:

If the new cabinets are added, it is expected that the contribution margin of other product lines
at the cabinet shop will drop by $20,000 per year.

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Chapter 12 - Differential Analysis: The Key to Decision Making

75. If the new cabinet product line is added next year, the increase in net operating income
resulting from this decision would be:
A. $80,000
B. $225,000
C. $125,000
D. $105,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped
Level: Medium

12-146

Chapter 12 - Differential Analysis: The Key to Decision Making

76. What is the lowest selling price per unit that could be charged for the new cabinets from
the following list and still make it economically desirable to add the new product line?
A. $160
B. $164
C. $171
D. $151

The selling price would have to cover all of the costs of $795,000. On a per unit basis, the
cost is $159 per unit (= $795,000 5,000 units). The lowest selling price on the list that
covers the cost is $160 per unit.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped
Level: Hard

12-147

Chapter 12 - Differential Analysis: The Key to Decision Making

Knaack Corporation is presently making part R20 that is used in one of its products. A total
of 18,000 units of this part are produced and used every year. The company's Accounting
Department reports the following costs of producing the part at this level of activity:

An outside supplier has offered to produce and sell the part to the company for $27.70 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, none of which would be avoided if the part were purchased
instead of produced internally.

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77. If management decides to buy part R20 from the outside supplier rather than to continue
making the part, what would be the annual impact on the company's overall net operating
income?
A. Net operating income would increase by $162,000 per year.
B. Net operating income would increase by $50,400 per year.
C. Net operating income would decline by $50,400 per year.
D. Net operating income would decline by $162,000 per year.

Because of the higher cost to purchase, net operating income would decline by $50,400 per
year.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-03 Prepare a make or buy analysis
Level: Easy

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Chapter 12 - Differential Analysis: The Key to Decision Making

78. In addition to the facts given above, assume that the space used to produce part R20 could
be used to make more of one of the company's other products, generating an additional
segment margin of $27,000 per year for that product. What would be the impact on the
company's overall net operating income of buying part R20 from the outside supplier and
using the freed space to make more of the other product?
A. Net operating income would increase by $27,000 per year.
B. Net operating income would decline by $135,000 per year.
C. Net operating income would decline by $23,400 per year.
D. Net operating income would decline by $189,000 per year.

Because of the higher cost of purchasing, net operating income would decline by $23,400 per
year.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-03 Prepare a make or buy analysis
Level: Medium

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Chapter 12 - Differential Analysis: The Key to Decision Making

Meltzer Corporation is presently making part O13 that is used in one of its products. A total
of 3,000 units of this part are produced and used every year. The company's Accounting
Department reports the following costs of producing the part at this level of activity:

An outside supplier has offered to produce and sell the part to the company for $27.00 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 $3,000 of
these allocated general overhead costs would be avoided.

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Chapter 12 - Differential Analysis: The Key to Decision Making

79. If management decides to buy part O13 from the outside supplier rather than to continue
making the part, what would be the annual impact on the company's overall net operating
income?
A. Net operating income would decline by $23,100 per year.
B. Net operating income would decline by $26,100 per year.
C. Net operating income would decline by $20,100 per year.
D. Net operating income would decline by $8,700 per year.

Net operating income would decline by $8,700 per year.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-03 Prepare a make or buy analysis
Level: Easy

12-152

Chapter 12 - Differential Analysis: The Key to Decision Making

80. In addition to the facts given above, assume that the space used to produce part O13 could
be used to make more of one of the company's other products, generating an additional
segment margin of $26,000 per year for that product. What would be the impact on the
company's overall net operating income of buying part O13 from the outside supplier and
using the freed space to make more of the other product?
A. Net operating income would decline by $49,100 per year.
B. Net operating income would increase by $26,000 per year.
C. Net operating income would increase by $2,900 per year.
D. Net operating income would increase by $17,300 per year.

Net operating income would increase by $17,300 per year.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-03 Prepare a make or buy analysis
Level: Medium

12-153

Chapter 12 - Differential Analysis: The Key to Decision Making

Ahsan Company 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 $45.70 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 $318,000 per year.
If the part were purchased from the outside supplier, all of the direct labor cost of the part
would be avoided. However, $3.50 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.

81. How much of the unit product cost of $40.50 is relevant in the decision of whether to
make or buy the part?
A. $40.50
B. $15.20
C. $27.90
D. $37.00

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-03 Prepare a make or buy analysis
Level: Easy

12-154

Chapter 12 - Differential Analysis: The Key to Decision Making

82. What is the net total dollar advantage (disadvantage) of purchasing the part rather than
making it?
A. $318,000
B. $(522,000)
C. $(312,000)
D. $(204,000)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-03 Prepare a make or buy analysis

12-155

Chapter 12 - Differential Analysis: The Key to Decision Making

83. 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?
A. $40.50
B. $42.30
C. $45.80
D. $5.30

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-03 Prepare a make or buy analysis
Level: Hard

Talboe Company makes wheels which it uses in the production of children's wagons.
Talboe's costs to produce 200,000 wheels annually are as follows:

An outside supplier has offered to sell Talboe similar wheels for $0.80 per wheel. If the
wheels are purchased from the outside supplier, $25,000 of annual fixed manufacturing
overhead would be avoided and the facilities now being used to make the wheels would be
rented to another company for $55,000 per year.

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Chapter 12 - Differential Analysis: The Key to Decision Making

84. If Talboe chooses to buy the wheel from the outside supplier, then the change in annual
net operating income is a:
A. $5,000 decrease
B. $50,000 increase
C. $70,000 increase
D. $40,000 increase

The change in annual net operating income is a $50,000 increase.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-03 Prepare a make or buy analysis
Level: Medium

12-157

Chapter 12 - Differential Analysis: The Key to Decision Making

85. What is the highest price that Talboe could pay the outside supplier for each wheel and
still be economically indifferent between making or buying the wheels?
A. $0.95
B. $1.15
C. $1.00
D. $1.05

The company could pay up to $1.05 per unit ($210,000 200,000 units).

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-03 Prepare a make or buy analysis
Level: Hard

The Rodgers Company makes 27,000 units of a certain component each year for use in one
of its products. The cost per unit for the component at this level of activity is as follows:

Rodgers has received an offer from an outside supplier who is willing to provide 27,000 units
of this component each year at a price of $25 per component. Assume that direct labor is a
variable cost. None of the fixed manufacturing overhead would be avoidable if this
component were purchased from the outside supplier.

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86. Assume that there is no other use for the capacity now being used to produce the
component and the total fixed manufacturing overhead of the company would be unaffected
by this decision. If Rodgers Company purchases the components rather than making them
internally, what would be the impact on the company's annual net operating income?
A. $94,500 increase
B. $81,000 decrease
C. $237,600 decrease
D. $124,000 increase

Expenses would increase by $81,000 (= $675,000 - $594,000), so annual net operating


income would decrease by $81,000.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-03 Prepare a make or buy analysis
Level: Medium

12-159

Chapter 12 - Differential Analysis: The Key to Decision Making

87. Assume that if the component is purchased from the outside supplier, $35,100 of annual
fixed manufacturing overhead would be avoided and the facilities now being used to make the
component would be rented to another company for $64,800 per year. If Rodgers chooses to
buy the component from the outside supplier under these circumstances, then the impact on
annual net operating income due to accepting the offer would be:
A. $18,900 decrease
B. $18,900 increase
C. $21,400 decrease
D. $21,400 increase

Expenses would decrease by $18,900 (= $629,100 - $610,200), so annual net operating


income would increase by $18,900.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-03 Prepare a make or buy analysis
Level: Hard

12-160

Chapter 12 - Differential Analysis: The Key to Decision Making

Meacham Company has traditionally made a subcomponent of its major product. Annual
production of 20,000 subcomponents results in the following costs:

Meacham has received an offer from an outside supplier who is willing to provide 20,000
units of this subcomponent each year at a price of $28 per subcomponent. Meacham knows
that the facilities now being used to make the subcomponent would be rented to another
company for $75,000 per year if the subcomponent were purchased from the outside supplier.
Otherwise, the fixed overhead would be unaffected.

88. If Meacham decides to purchase the subcomponent from the outside supplier, how much
higher or lower will net operating income be than if Meacham continued to make the
subcomponent?
A. $45,000 higher
B. $70,000 higher
C. $30,000 lower
D. $70,000 lower

Expenses would decrease by $45,000 (= $530,000 - $485,000), so if Meacham decides to


purchase the subcomponent from the outside supplier, its net operating income would be
$45,000 higher.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-03 Prepare a make or buy analysis
Level: Medium

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Chapter 12 - Differential Analysis: The Key to Decision Making

89. Suppose the price for the subcomponent has not been set. At what price per unit charged
by the outside supplier would Meacham be economically indifferent between making the
subcomponent or buying it from the outside?
A. $30.25
B. $29.25
C. $26.50
D. $31.50

The purchase price at which the company would be indifferent is $30.25 per unit (= $605,000
20,000 units).

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-03 Prepare a make or buy analysis
Level: Hard

12-162

Chapter 12 - Differential Analysis: The Key to Decision Making

Elhard Company produces a single product. The cost of producing and selling a single unit of
this product at the company's normal activity level of 40,000 units per month is as follows:

The normal selling price of the product is $51.10 per unit.


An order has been received from an overseas customer for 2,000 units to be delivered this
month at a special discounted price. This order would have no effect on the company's normal
sales and would not change the total amount of the company's fixed costs. The variable selling
and administrative expense would be $0.10 less per unit on this order than on normal sales.
Direct labor is a variable cost in this company.

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Chapter 12 - Differential Analysis: The Key to Decision Making

90. Suppose there is ample idle capacity to produce the units required by the overseas
customer and the special discounted price on the special order is $41.60 per unit. By how
much would this special order increase (decrease) the company's net operating income for the
month?
A. $2,000
B. $25,200
C. $(8,400)
D. $(18,800)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-04 Prepare an analysis showing whether a special order should be accepted
Level: Medium

12-164

Chapter 12 - Differential Analysis: The Key to Decision Making

91. Suppose the company is already operating at capacity when the special order is received
from the overseas customer. What would be the opportunity cost of each unit delivered to the
overseas customer?
A. $5.40
B. $5.30
C. $9.50
D. $22.00
The opportunity cost is the contribution margin on normal sales.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-04 Prepare an analysis showing whether a special order should be accepted
Level: Hard

12-165

Chapter 12 - Differential Analysis: The Key to Decision Making

92. Suppose there is not enough idle capacity to produce all of the units for the overseas
customer and accepting the special order would require cutting back on production of 200
units for regular customers. The minimum acceptable price per unit for the special order is
closest to:
A. $38.80
B. $31.20
C. $51.10
D. $45.80

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Minimum acceptable price:

AACSB: Analytic
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AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-04 Prepare an analysis showing whether a special order should be accepted
Level: Hard

12-167

Chapter 12 - Differential Analysis: The Key to Decision Making

The Varone Company makes a single product called a Hom. The company has the capacity to
produce 40,000 Homs per year. Per unit costs to produce and sell one Hom at that activity
level are:

The regular selling price for one Hom is $60. A special order has been received at Varone
from the Fairview Company to purchase 8,000 Homs next year at 15% off the regular selling
price. If this special order were accepted, the variable selling expense would be reduced by
25%. However, Varone would have to purchase a specialized machine to engrave the
Fairview name on each Hom in the special order. This machine would cost $12,000 and it
would have no use after the special order was filled. The total fixed costs, both manufacturing
and selling, are constant within the relevant range of 30,000 to 40,000 Homs per year.
Assume direct labor is a variable cost.

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93. If Varone can expect to sell 32,000 Homs next year through regular channels and the
special order is accepted at 15% off the regular selling price, the effect on net operating
income next year due to accepting this order would be a:
A. $52,000 increase
B. $80,000 increase
C. $24,000 decrease
D. $68,000 increase

*Regular selling price: $60 (1 - 15%) = $51


**Variable selling expense: $8 (1 - 25%) = $6

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-04 Prepare an analysis showing whether a special order should be accepted
Level: Medium

12-169

Chapter 12 - Differential Analysis: The Key to Decision Making

94. If Varone can expect to sell 32,000 Homs next year through regular channels, at what
special order price from Fairview should Varone be economically indifferent between either
accepting or not accepting this special order?
A. $51.00
B. $48.20
C. $42.50
D. $39.60

*Variable selling expense: $8 (1 - 25%) = $6


Varone is economically indifferent between either accepting or not accepting this special
order at the point where revenue equals cost, so the selling price would have to be at least
$42.50 per unit (= $340,000 8,000 units).

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-04 Prepare an analysis showing whether a special order should be accepted
Level: Hard

12-170

Chapter 12 - Differential Analysis: The Key to Decision Making

95. If Varone has an opportunity to sell 37,960 Homs next year through regular channels and
the special order is accepted for 15% off the regular selling price, the effect on net operating
income next year due to accepting this order would be a:
A. $33,320 decrease
B. $33,320 increase
C. $35,480 decrease
D. $35,480 increase

Since the special order would displace 5,960 units of normal sales, the lost contribution
margin would be $101,320 (= $17 per unit 5,960 units).

*Regular selling price: $60 (1 - 15%) = $51


**Variable selling expense: $8 (1 - 25%) = $6
Consequently, accepting the special order would generate incremental net operating income
of $68,000, but would displace normal sales generating a contribution margin of $101,320,so
the net effect would be a $33,320 decrease (= $101,320 - $68,000) in net operating income.

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Chapter 12 - Differential Analysis: The Key to Decision Making

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-04 Prepare an analysis showing whether a special order should be accepted
Level: Hard

The Immanuel Company has just obtained a request for a special order of 6,000 jigs to be
shipped at the end of the month at a selling price of $7 each. The company has a production
capacity of 90,000 jigs per month with total fixed production costs of $144,000. At present,
the company is selling 80,000 jigs per month through regular channels at a selling price of
$11 each. For these regular sales, the cost for one jig is:

If the special order is accepted, Immanuel will not incur any selling expense; however, it will
incur shipping costs of $0.30 per unit. Total fixed production cost would not be affected by
this order.

96. If Immanuel accepts this special order, the change in monthly net operating income will
be a:
A. $12,600 increase
B. $14,400 increase
C. $3,600 increase
D. $1,800 increase

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-04 Prepare an analysis showing whether a special order should be accepted
Level: Medium

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Chapter 12 - Differential Analysis: The Key to Decision Making

97. At what selling price per unit should Immanuel be indifferent between accepting or
rejecting the special offer?
A. $7.40
B. $7.70
C. $6.40
D. $4.90

Immanuel Company is economically indifferent between either accepting or not accepting this
special order at the point where revenue equals cost; this would occur when the selling price
is $4.90 per unit (= $29,400 6,000 units).

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-04 Prepare an analysis showing whether a special order should be accepted
Level: Medium

12-173

Chapter 12 - Differential Analysis: The Key to Decision Making

98. Suppose that regular sales of jigs total 85,000 units per month. All other conditions remain
the same. If Immanuel accepts the special order, the change in monthly net operating income
will be:
A. $14,400 increase
B. $7,200 increase
C. $3,600 decrease
D. $5,400 decrease

The special order would generate incremental net operating income of $12,600, but would
displace normal sales with a contribution margin of $5,400. The net effect would be a $7,200
increase (= $12,600 - $5,400) in net operating income.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-04 Prepare an analysis showing whether a special order should be accepted
Level: Hard

12-174

Chapter 12 - Differential Analysis: The Key to Decision Making

Mckerchie Inc. manufactures industrial components. One of its products, which is used in the
construction of industrial air conditioners, is known as G62. Data concerning this product are
given below:

The above per unit data are based on annual production of 9,000 units of the component.
Direct labor can be considered to be a variable cost.

99. The company has received a special, one-time-only order for 300 units of component G62.
There would be no variable selling expense on this special order and the total fixed
manufacturing overhead and fixed selling and administrative expenses of the company would
not be affected by the order. Assuming that Mckerchie has excess capacity and can fill the
order without cutting back on the production of any product, what is the minimum price per
unit on the special order below which the company should not go?
A. $26
B. $67
C. $55
D. $160
The selling price for the special order would have to at least cover the variable cost per unit of
$26.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-04 Prepare an analysis showing whether a special order should be accepted
Level: Medium
Source: CMA, adapted

12-175

Chapter 12 - Differential Analysis: The Key to Decision Making

100. The company has received a special, one-time-only order for 300 units of component
G62. There would be no variable selling expense on this special order and the total fixed
manufacturing overhead and fixed selling and administrative expenses of the company would
not be affected by the order. However, assume that Mckerchie has no excess capacity and this
special order would require 50 minutes of the constraining resource, which could be used
instead to produce products with a total contribution margin of $6,900. What is the minimum
price per unit on the special order below which the company should not go?
A. $90
B. $23
C. $49
D. $78

The selling price for the special order would have to cover both the $26 variable cost per unit
and the opportunity cost of $6,900.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-04 Prepare an analysis showing whether a special order should be accepted
Level: Hard
Source: CMA, adapted

12-176

Chapter 12 - Differential Analysis: The Key to Decision Making

101. Refer to the original data in the problem. What is the current contribution margin per unit
for component G62 based on its selling price of $160 and its annual production of 9,000
units?
A. $28
B. $134
C. $93
D. $132

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-04 Prepare an analysis showing whether a special order should be accepted
Level: Easy
Source: CMA, adapted

The constraint at Dalbey Corporation is time on a particular machine. The company makes
three products that use this machine. Data concerning those products appear below:

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Chapter 12 - Differential Analysis: The Key to Decision Making

102. Rank the products in order of their current profitability from most profitable to least
profitable. In other words, rank the products in the order in which they should be emphasized.
A. WP, FE, MB
B. FE, WP, MB
C. FE, MB, WP
D. MB, FE, WP

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-05 Determine the most profitable use of a constrained resource
Level: Easy

12-178

Chapter 12 - Differential Analysis: The Key to Decision Making

103. 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 this constrained resource?
A. $12.50 per minute
B. $29.96 per unit
C. $10.70 per minute
D. $71.92 per unit

The company should be willing to pay up to the contribution margin per minute for the
marginal job, which is $10.70 per minute for WP.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-06 Determine the value of obtaining more of the constrained resource
Level: Medium

Marrin Corporation makes three products that use the current constraint-a particular type of
machine. Data concerning those products appear below:

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Chapter 12 - Differential Analysis: The Key to Decision Making

104. Rank the products in order of their current profitability from most profitable to least
profitable. In other words, rank the products in the order in which they should be emphasized.
A. KZ, XB, ZP
B. ZP, KZ, XB
C. XB, ZP, KZ
D. KZ, ZP, XB

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-05 Determine the most profitable use of a constrained resource
Level: Easy

12-180

Chapter 12 - Differential Analysis: The Key to Decision Making

105. 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?
A. $14.30 per minute
B. $14.80 per minute
C. $33.81 per unit
D. $118.69 per unit

The company should be willing to pay up to the contribution margin per minute for the
marginal job, which is $14.30 per minute for KZ.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-06 Determine the value of obtaining more of the constrained resource
Level: Medium

Cress Company 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
11,500 minutes are available per month on these machines.

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Chapter 12 - Differential Analysis: The Key to Decision Making

106. How many minutes of milling machine time would be required to satisfy demand for all
four products?
A. 12,000
B. 10,800
C. 9,000
D. 11,500

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-05 Determine the most profitable use of a constrained resource
Level: Easy

12-182

Chapter 12 - Differential Analysis: The Key to Decision Making

107. Which product makes the LEAST profitable use of the milling machines?
A. Product A
B. Product B
C. Product C
D. Product D

Product A makes the least profitable use of the milling machines.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-05 Determine the most profitable use of a constrained resource
Level: Medium

12-183

Chapter 12 - Differential Analysis: The Key to Decision Making

108. Which product makes the MOST profitable use of the milling machines?
A. Product A
B. Product B
C. Product C
D. Product D

Product D makes the most profitable use of the milling machines.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-05 Determine the most profitable use of a constrained resource
Level: Medium

12-184

Chapter 12 - Differential Analysis: The Key to Decision Making

109. Up to how much should the company be willing to pay for one additional minute of
milling machine time if the company has made the best use of the existing milling machine
capacity? (Round off to the nearest whole cent.)
A. $7.46
B. $15.20
C. $19.40
D. $0.00

The company should be willing to pay up to the contribution margin per minute for the
marginal job, which is $7.46 per minute for Product A.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-06 Determine the value of obtaining more of the constrained resource
Level: Medium

12-185

Chapter 12 - Differential Analysis: The Key to Decision Making

Broze Company 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
53,600 minutes are available per month on these machines.
Direct labor is a variable cost in this company.

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Chapter 12 - Differential Analysis: The Key to Decision Making

110. How many minutes of grinding machine time would be required to satisfy demand for all
four products?
A. 56,100
B. 40,900
C. 53,600
D. 13,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-05 Determine the most profitable use of a constrained resource
Level: Easy

12-187

Chapter 12 - Differential Analysis: The Key to Decision Making

111. Which product makes the LEAST profitable use of the grinding machines?
A. Product A
B. Product B
C. Product C
D. Product D

Product C makes the least profitable use of the grinding machines.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-05 Determine the most profitable use of a constrained resource
Level: Hard

12-188

Chapter 12 - Differential Analysis: The Key to Decision Making

112. Which product makes the MOST profitable use of the grinding machines?
A. Product A
B. Product B
C. Product C
D. Product D

Product D makes the MOST profitable use of the grinding machines.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-05 Determine the most profitable use of a constrained resource
Level: Hard

12-189

Chapter 12 - Differential Analysis: The Key to Decision Making

113. 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 off to the nearest whole cent.)
A. $35.90
B. $0.00
C. $8.58
D. $11.60

The company should be willing to pay up to the contribution margin per minute for the
marginal job, which is $8.58 per minute for Product C.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-06 Determine the value of obtaining more of the constrained resource
Level: Hard

12-190

Chapter 12 - Differential Analysis: The Key to Decision Making

Dunford Company produces three products with the following costs and selling prices:

114. If Dunford has a limit of 20,000 direct labor hours but no limit on units sold or machine
hours, then the ranking of the products from the most profitable to the least profitable use of
the constrained resource is:
A. X, Y, Z
B. Y, Z, X
C. X, Z, Y
D. Z, Y, X

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-05 Determine the most profitable use of a constrained resource
Level: Medium

12-191

Chapter 12 - Differential Analysis: The Key to Decision Making

115. If Dunford has a limit of 30,000 machine hours but no limit on units sold or direct labor
hours, then the ranking of the products from the most profitable to the least profitable use of
the constrained resource is:
A. Y, Z, X
B. X, Y, Z
C. X, Z, Y
D. Z, X, Y

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-05 Determine the most profitable use of a constrained resource
Level: Medium

Sohr Corporation processes sugar beets that it purchases from farmers. Sugar beets are
processed in batches. A batch of sugar beets costs $50 to buy from farmers and $15 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 $20 or processed further for $19 to make
the end product industrial fiber that is sold for $58. The beet juice can be sold as is for $41 or
processed further for $23 to make the end product refined sugar that is sold for $58.

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Chapter 12 - Differential Analysis: The Key to Decision Making

116. How much profit (loss) does the company make by processing one batch of sugar beets
into the end products industrial fiber and refined sugar?
A. $(107)
B. $(4)
C. $9
D. $13

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further
Level: Easy

12-193

Chapter 12 - Differential Analysis: The Key to Decision Making

117. How much profit (loss) does the company make by processing the intermediate product
beet juice into refined sugar rather than selling it as is?
A. $(71)
B. $(6)
C. $(39)
D. $(21)

The company incurs a loss of $(6) a unit by processing the intermediate product beet juice
into refined sugar rather than selling it as is.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further
Level: Easy

12-194

Chapter 12 - Differential Analysis: The Key to Decision Making

118. Which of the intermediate products should be processed further?


A. beet fiber should NOT be processed into industrial fiber; beet juice should be processed
into refined sugar
B. beet fiber should NOT be processed into industrial fiber; beet juice should NOT be
processed into refined sugar
C. beet fiber should be processed into industrial fiber; beet juice should be processed into
refined sugar
D. beet fiber should be processed into industrial fiber; beet juice should NOT be processed
into refined sugar

Beet fiber should be processed into industrial fiber; beet juice should NOT be processed into
refined sugar.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further
Level: Easy

Resendes Refiners, Inc., processes sugar cane that it purchases from farmers. Sugar cane is
processed in batches. A batch of sugar cane costs $48 to buy from farmers and $16 to crush in
the company's plant. Two intermediate products, cane fiber and cane juice, emerge from the
crushing process. The cane fiber can be sold as is for $24 or processed further for $17 to make
the end product industrial fiber that is sold for $38. The cane juice can be sold as is for $34 or
processed further for $23 to make the end product molasses that is sold for $76.

12-195

Chapter 12 - Differential Analysis: The Key to Decision Making

119. How much profit (loss) does the company make by processing one batch of sugar cane
into the end products industrial fiber and molasses?
A. $16
B. $(104)
C. $(6)
D. $10

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further
Level: Easy

120. How much profit (loss) does the company make by processing the intermediate product
cane juice into molasses rather than selling it as is?
A. $3
B. $19
C. $(45)
D. $(13)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further
Level: Easy

12-196

Chapter 12 - Differential Analysis: The Key to Decision Making

121. Which of the intermediate products should be processed further?


A. Cane fiber should NOT be processed into industrial fiber; Cane juice should be processed
into molasses
B. Cane fiber should be processed into industrial fiber; Cane juice should be processed into
molasses
C. Cane fiber should NOT be processed into industrial fiber; Cane juice should NOT be
processed into molasses
D. Cane fiber should be processed into industrial fiber; Cane juice should NOT be processed
into molasses

Cane fiber should NOT be processed into industrial fiber; Cane juice should be processed into
molasses.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further
Level: Easy

Dodrill 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 splitoff point or processed further. Data concerning these products appear below:

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Chapter 12 - Differential Analysis: The Key to Decision Making

122. What is the net monetary advantage (disadvantage) of processing Product X beyond the
split-off point?
A. $26,800
B. $7,000
C. $4,800
D. $29,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further
Level: Medium

123. What is the net monetary advantage (disadvantage) of processing Product Y beyond the
split-off point?
A. $(4,200)
B. $21,800
C. $24,400
D. $(1,600)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further
Level: Medium

12-198

Chapter 12 - Differential Analysis: The Key to Decision Making

124. What is the minimum amount the company should accept for Product X if it is to be sold
at the split-off point?
A. $26,800
B. $19,800
C. $52,200
D. $45,200

The minimum amount the company should accept for Product X if it is to be sold at the splitoff point is $26,800.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further
Level: Hard

Payne Company makes two products, M and N, in a joint process. At the split-off point,
40,000 units of M and 50,000 units of N are available each month. Monthly joint production
costs are $270,000.
Product M can be sold at the split-off point for $4.20 per unit. Product N can either be sold at
the split-off point for $3.20 per unit or it can be processed further and sold for $6.30 per unit.
If N is processed further, additional processing costs of $2.50 per unit will be incurred.

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Chapter 12 - Differential Analysis: The Key to Decision Making

125. If N is processed further and then sold, rather than being sold at the split-off point, the
change in monthly operating income would be a:
A. $30,000 increase
B. $315,000 increase
C. $155,000 increase
D. $125,000 decrease

Total profit = $0.60 per unit 50,000 units = $30,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further
Level: Medium

12-200

Chapter 12 - Differential Analysis: The Key to Decision Making

126. What would the selling price per unit of product N need to be after further processing in
order for Payne Company to be economically indifferent between selling N at the split-off
point or processing N further?
A. $8.70
B. $6.70
C. $7.20
D. $5.70
Profit from further processing
The company would be indifferent between selling Product N at the split-off point or
processing Product N further when the sales value at the split-off point equals the incremental
profit that the company could earn by processing further.
Sales value at split-off point = Final sales value after further processing - Cost of further
processing
$3.20 = Final sales value after further processing - $2.50
Final sales value after further processing = $3.20 + $2.50 = $5.70

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further
Level: Medium

Essay Questions

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Chapter 12 - Differential Analysis: The Key to Decision Making

127. Marcell 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?

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision
Level: Easy

12-202

Chapter 12 - Differential Analysis: The Key to Decision Making

128. Costs associated with two alternatives, code-named Q and R, being considered by
Corniel 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?

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision
Level: Easy

12-203

Chapter 12 - Differential Analysis: The Key to Decision Making

129. The management of Therriault Corporation is considering dropping product U51Y. 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 $280,000 of the fixed manufacturing expenses
and $140,000 of the fixed selling and administrative expenses are avoidable if product U51Y
is discontinued.
Required:
What would be the effect on the company's overall net operating income if product U51Y
were dropped? Should the product be dropped? Show your work!

Net operating income would increase by $8,000 if product U51Y were dropped. Therefore,
the product should be dropped.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped
Level: Easy

12-204

Chapter 12 - Differential Analysis: The Key to Decision Making

130. Nutall Corporation is considering dropping product N28X. 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 $199,000 of the fixed manufacturing expenses
and $114,000 of the fixed selling and administrative expenses are avoidable if product N28X
is discontinued.
Required:
a. According to the company's accounting system, what is the net operating income earned by
product N28X? Show your work!
b. What would be the effect on the company's overall net operating income of dropping
product N28X? Should the product be dropped? Show your work!

a. According to the company's accounting system, the product's net operating loss is $66,000.
b. Net operating income would decline by $81,000 if product N28X were dropped. Therefore,
the product should not be dropped.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped
Level: Easy

12-205

Chapter 12 - Differential Analysis: The Key to Decision Making

131. The management of Rodarmel Corporation is considering dropping product G91Q. 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 $57,000 of the fixed manufacturing expenses
and $40,000 of the fixed selling and administrative expenses are avoidable if product G91Q is
discontinued.
Required:
a. What is the net operating income earned by product G91Q according to the company's
accounting system? Show your work!
b. What would be the effect on the company's overall net operating income of dropping
product G91Q? Should the product be dropped? Show your work!

a. According to the company's accounting system, the product's net operating loss is $7,000.
b. Net operating income would decline by $103,000 if product G91Q were dropped.
Therefore, the product should not be dropped.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped
Level: Easy

12-206

Chapter 12 - Differential Analysis: The Key to Decision Making

132. Mr. Earl Pearl, accountant for Margie Knall Co., Inc., has prepared the following
product-line income data:

The following additional information is available:


* The factory rent of $1,500 assigned to Product C is avoidable if the product were dropped.
* The company's total depreciation would not be affected by dropping C.
* Eliminating Product C will reduce the monthly utility bill from $1,500 to $800.
* All supervisors' salaries are avoidable.
* If Product C is discontinued, the maintenance department will be able to reduce monthly
expenses from $3,000 to $2,000.
* Elimination of Product C will make it possible to cut two persons from the administrative
staff; their combined salaries total $3,000.
Required:
Prepare an analysis showing whether Product C should be eliminated.

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Chapter 12 - Differential Analysis: The Key to Decision Making

Since there is a net $800 disadvantage to dropping Product C, it should not be dropped.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped
Level: Medium

12-208

Chapter 12 - Differential Analysis: The Key to Decision Making

133. The Hayes Company manufactures and sells several products, one of which is called a
slip differential. The company normally sells 30,000 units of the slip differential each month.
At this activity level, unit costs are:

An outside supplier has offered to produce the slip differentials for the Hayes Company, and
to ship them directly to the Hayes Company's customers. This arrangement would permit the
Hayes Company to reduce its variable selling expenses by one third (due to elimination of
freight costs). The facilities now being used to produce the slip differentials would be idle and
fixed manufacturing overhead would continue at 60 percent of its present level. The total
fixed selling expenses of the company would be unaffected by this decision.
Required:
What is the maximum acceptable price quotation for the slip differentials from the outside
supplier?
The total cost savings from purchasing the slip differentials is $420,000 as computed below:

Therefore, the company would be willing to pay no more than $14 for each unit since the total
purchase price would then be $420,000 ($14 30,000 = $420,000), which is exactly the cost
savings.
$14 is the relevant cost figure. To be acceptable, the quotation received from the outside
supplier must be less than $14.

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Chapter 12 - Differential Analysis: The Key to Decision Making


AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-03 Prepare a make or buy analysis
Level: Medium

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Chapter 12 - Differential Analysis: The Key to Decision Making

134. Bady Inc. makes a range of products. The company's predetermined overhead rate is $14
per direct labor-hour, which was calculated using the following budgeted data:

Component M3 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 M3 for $108 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. Bady chronically has idle capacity.
Required:
Is the offer from the outside supplier financially attractive? Why?

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Direct materials, direct labor, and variable manufacturing overhead are relevant in this
decision. Fixed manufacturing overhead is not relevant since it would not be affected by the
decision. The variable portion of the manufacturing overhead rate is computed as follows:
Variable portion of the predetermined overhead rate = Variable manufacturing overhead
Direct labor-hours = $100,000 25,000 direct labor-hours = $4.00 per direct labor-hour
The direct-labor hours per unit for the special order can be determined as follows:

Consequently, the variable manufacturing overhead for the special order would be:

Putting this all together:

Because the outside supplier has offered to sell the component for $108.00 each, but it only
costs the company $95.20 to make the component internally, this is not a financially attractive
offer.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-03 Prepare a make or buy analysis
Level: Hard
Source: CIMA, adapted

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135. Kramer Company makes 4,000 units per year of a part called an axial tap for use in one
of its products. Data concerning the unit production costs of the axial tap follow:

An outside supplier has offered to sell Kramer Company all of the axial taps it requires. If
Kramer Company decided to discontinue making the axial taps, 40% of the above fixed
manufacturing overhead costs could be avoided. Assume that direct labor is a variable cost.
Required:
a. Assume Kramer Company has no alternative use for the facilities presently devoted to
production of the axial taps. If the outside supplier offers to sell the axial taps for $65 each,
should Kramer Company accept the offer? Fully support your answer with appropriate
calculations.
b. Assume that Kramer Company could use the facilities presently devoted to production of
the axial taps to expand production of another product that would yield an additional
contribution margin of $80,000 annually. What is the maximum price Kramer Company
should be willing to pay the outside supplier for axial taps?

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a. The analysis of the alternatives follows below:

The company should make the part rather than buy it from the outside supplier since it costs
$4 less under that alternative.
b. The maximum acceptable price is $81 since that is the cost to the company of making the
part itself when the opportunity cost is included:

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-03 Prepare a make or buy analysis
Level: Hard

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Chapter 12 - Differential Analysis: The Key to Decision Making

136. Masse Corporation uses part G18 in one of its products. The company's Accounting
Department reports the following costs of producing the 16,000 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 $28.00 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 $22,000
of these allocated general overhead costs would be avoided. In addition, the space used to
produce part G18 could be used to make more of one of the company's other products,
generating an additional segment margin of $22,000 per year for that product.
Required:
a. Prepare a report that shows the effect on the company's total net operating income of
buying part G18 from the supplier rather than continuing to make it inside the company.
b. Which alternative should the company choose?

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b. The total cost of the make alternative is lower by $72,800. Thus, net operating income
would decline by $72,800 if the offer from the supplier were accepted. Therefore, the
company should continue to make the part itself.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-03 Prepare a make or buy analysis
Level: Medium

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137. Part E43 is used in one of Ran Corporation's products. The company's Accounting
Department reports the following costs of producing the 12,000 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 $14.70 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 $5,000 of
these allocated general overhead costs would be avoided.
Required:
a. Prepare a report that shows the effect on the company's total net operating income of
buying part E43 from the supplier rather than continuing to make it inside the company.
b. Which alternative should the company choose?

b. The total cost of the make alternative is lower by $34,600. Thus, net operating income
would decline by $34,600 if the offer from the supplier were accepted. Therefore, the
company should continue to make the part itself.

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AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-03 Prepare a make or buy analysis
Level: Easy

138. Foulds Company makes 10,000 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 $42.30 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 $39,000 per year.
If the part were purchased from the outside supplier, all of the direct labor cost of the part
would be avoided. However, $6.40 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.
Required:
a. How much of the unit product cost of $47.90 is relevant in the decision of whether to make
or buy the part?
b. What is the net total dollar advantage (disadvantage) of purchasing the part rather than
making it?
c. 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 10,000 units required each year?

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a. Relevant cost per unit:

b. Net advantage (disadvantage):

c. Maximum acceptable purchase price:

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-03 Prepare a make or buy analysis
Level: Hard

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139. Jerston Company has an annual plant capacity of 3,000 units. Data concerning this
product are given below:

The company has received a special order for 500 units at a selling price of $45 each. Regular
sales would not be affected, and sales commissions on the 500 units would be reduced by onethird. This special order would have no impact on total fixed costs.
Required:
Determine whether the company should accept the special order. Show all computations.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-04 Prepare an analysis showing whether a special order should be accepted
Level: Medium

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140. Nowlan Co. manufactures and sells trophies for winners of athletic and other events. Its
manufacturing plant has the capacity to produce 11,000 trophies each month; current monthly
production is 8,800 trophies. The company normally charges $87 per trophy. Cost data for the
current level of production are shown below:

The company has just received a special one-time order for 500 trophies at $50 each. For this
particular order, no variable selling and administrative costs would be incurred. This order
would also have no effect on fixed costs.
Required:
Should the company accept this special order? Why?
Only the direct materials and direct labor costs are relevant in this decision. To make the
decision, we must compute the average direct materials and direct labor cost per unit.

Since the price on the special order is $50 per trophy and the relevant cost is $57, the
company would suffer a loss of $7 per trophy. Therefore, the special order should not be
accepted.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-04 Prepare an analysis showing whether a special order should be accepted
Level: Medium
Source: CMA, adapted

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141. Holtrop Corporation has received a request for a special order of 9,000 units of product
Z74 for $46.50 each. The normal selling price of this product is $51.60 each, but the units
would need to be modified slightly for the customer. The normal unit product cost of product
Z74 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 Z74 that would increase the variable costs by $6.20 per unit and that would require a
one-time investment of $46,000 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 effect on the company's total net operating income of accepting the special
order. Show your work!

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-04 Prepare an analysis showing whether a special order should be accepted
Level: Easy

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Chapter 12 - Differential Analysis: The Key to Decision Making

142. Rothery Co. manufactures and sells medals for winners of athletic and other events. Its
manufacturing plant has the capacity to produce 18,000 medals each month; current monthly
production is 17,100 medals. The company normally charges $88 per medal. Cost data for the
current level of production are shown below:

The company has just received a special one-time order for 600 medals at $73 each. For this
particular order, no variable selling and administrative costs would be incurred. This order
would also have no effect on fixed costs.
Required:
Should the company accept this special order? Why?
Only the direct materials and direct labor costs are relevant in this decision. To make the
decision, we must compute the average direct materials and direct labor cost per unit.

Since the price on the special order is $73 per medal and the relevant cost is only $48, the
company would earn a profit of $25 per medal. Therefore, the special order should be
accepted.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-04 Prepare an analysis showing whether a special order should be accepted
Level: Medium
Source: CMA, adapted

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143. Humes Corporation makes a range of products. The company's predetermined overhead
rate is $16 per direct labor-hour, which was calculated using the following budgeted data:

Management is considering a special order for 700 units of product J45K at $64 each. The
normal selling price of product J45K is $75 and the unit product cost is determined as
follows:

If the special order were accepted, normal sales of this and other products would not be
affected. The company has ample excess capacity to produce the additional units. 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 the special
order.
Required:
If the special order were accepted, what would be the impact on the company's overall profit?

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Direct materials, direct labor, and variable manufacturing overhead are relevant in this
decision. Fixed manufacturing overhead is not relevant since it would not be affected by the
decision. The variable portion of the manufacturing overhead rate is computed as follows:

The direct-labor hours per unit for the special order can be determined as follows:

Consequently, the variable manufacturing overhead for the special order would be:

Putting this all together:

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-04 Prepare an analysis showing whether a special order should be accepted
Level: Hard
Source: CIMA, adapted

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Chapter 12 - Differential Analysis: The Key to Decision Making

144. A customer has asked Twiner Corporation to supply 5,000 units of product D05, with
some modifications, for $40.20 each. The normal selling price of this product is $52.80 each.
The normal unit product cost of product D05 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 D05 that would increase the variable costs by $3.50 per unit and that would require a
one-time investment of $23,000 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 effect on the company's total net operating income of accepting the special
order. Show your work!

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-04 Prepare an analysis showing whether a special order should be accepted
Level: Easy

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Chapter 12 - Differential Analysis: The Key to Decision Making

145. Jumonville Company produces a single product. The cost of producing and selling a
single unit of this product at the company's normal activity level of 70,000 units per month is
as follows:

The normal selling price of the product is $56.70 per unit.


An order has been received from an overseas customer for 2,000 units to be delivered this
month at a special discounted price. This order would have no effect on the company's normal
sales and would not change the total amount of the company's fixed costs. The variable selling
and administrative expense would be $0.70 less per unit on this order than on normal sales.
Direct labor is a variable cost in this company.
Required:
a. Suppose there is ample idle capacity to produce the units required by the overseas customer
and the special discounted price on the special order is $51.20 per unit. By how much would
this special order increase (decrease) the company's net operating income for the month?
b. Suppose the company is already operating at capacity when the special order is received
from the overseas customer. What would be the opportunity cost of each unit delivered to the
overseas customer?
c. Suppose there is not enough idle capacity to produce all of the units for the overseas
customer and accepting the special order would require cutting back on production of 700
units for regular customers. What would be the minimum acceptable price per unit for the
special order?

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b. The opportunity cost is just the contribution margin on normal sales:

c. Minimum acceptable price:

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-04 Prepare an analysis showing whether a special order should be accepted
Level: Hard

12-228

Chapter 12 - Differential Analysis: The Key to Decision Making

146. Block Corporation makes three products that use the current constraint, which is a
particular type of machine. Data concerning those products appear below:

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?

Resulting ranking of products: FX, JR, ZZ


b. The company should be willing to pay up to $13.80 per minute to obtain more of the
constrained resource since this is the value to the company of using this constrained resource
to make more of product ZZ. By assumption, the other products will already have been
produced up to demand.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-05 Determine the most profitable use of a constrained resource
Learning Objective: 12-06 Determine the value of obtaining more of the constrained resource
Level: Easy

12-229

Chapter 12 - Differential Analysis: The Key to Decision Making

147. Redner, Inc. 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 grinding
machine is the constraint, with only 2,400 minutes of grinding machine time available this
week.
Required:
a. Given the grinding machine constraint, which product should be emphasized? Support your
answer with appropriate calculations.
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 grinding machine time?
a. The product to emphasize can be determined by computing the contribution margin per unit
of the scarce resource, which in this case is grinding machine time.

Product L should be emphasized because it has the greatest contribution margin per unit of the
scarce resource.
b. If additional grinding machine time would be used to produce more of Product L, the time
would be worth 60 minutes per hour $5 contribution margin per minute = $300 per hour.

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Chapter 12 - Differential Analysis: The Key to Decision Making


AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-05 Determine the most profitable use of a constrained resource
Learning Objective: 12-06 Determine the value of obtaining more of the constrained resource
Level: Hard

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Chapter 12 - Differential Analysis: The Key to Decision Making

148. Glunn 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
24,200 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.)

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a. Demand on the mixing machine:

Total time required for all products: 28,800


b. Optimal production plan:

c. The company should be willing to pay up to the contribution margin per minute for the
marginal job, which is $7.62.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-05 Determine the most profitable use of a constrained resource
Learning Objective: 12-06 Determine the value of obtaining more of the constrained resource
Level: Hard

12-233

Chapter 12 - Differential Analysis: The Key to Decision Making

149. Holvey 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 6,300
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.)

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Chapter 12 - Differential Analysis: The Key to Decision Making

a. Demand on the mixing machine:

b. Optimal production plan:

c. The company should be willing to pay up to the contribution margin per minute for the
marginal job, which is $9.67.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-05 Determine the most profitable use of a constrained resource
Learning Objective: 12-06 Determine the value of obtaining more of the constrained resource
Level: Medium

12-235

Chapter 12 - Differential Analysis: The Key to Decision Making

150. The constraint at Vrana 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?

Resulting ranking of products: PK, LA, NW


b. The company should be willing to pay up to $12.60 per minute to obtain more of the
constrained resource since this is the value to the company of using this constrained resource
to make more of product NW. By assumption, enough of the other two products will already
have been produced to fully satisfy demand.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-05 Determine the most profitable use of a constrained resource
Learning Objective: 12-06 Determine the value of obtaining more of the constrained resource
Level: Easy

12-236

Chapter 12 - Differential Analysis: The Key to Decision Making

151. Prevatte 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 $45 to buy from
farmers and $11 to peel in the company's plant. The peels produced from a batch can be sold
as is for animal feed for $27 or processed further for $16 to make the cocktail of nutrients that
are sold for $47. The depeeled spuds can be sold as is for $38 or processed further for $27 to
make frozen french fries that are sold for $59.
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? Show your work!
b. Should each of the intermediate products, peels and depeeled spuds, be sold as is or
processed further into an end product? Explain.
a. Analysis of the profitability of the overall operation:

b. Analysis of sell or process further:

The cocktail of organic nutrients should be processed further, but not the frozen french fries.

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Chapter 12 - Differential Analysis: The Key to Decision Making


AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further
Level: Easy

12-238

Chapter 12 - Differential Analysis: The Key to Decision Making

152. Spurrier Corporation produces two intermediate products, A and B, from a common
input. Intermediate product A can be further processed into end product X. Intermediate
product B can be further processed into end product Y. The common input is purchased in
batches that cost $50 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 $28 or processed further for $18
to make end product X that is sold for $43. Intermediate product B can be sold as is for $31 or
processed further for $24 to make end product Y that is sold for $68.
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 the common input
into the end products X and Y? Show your work!
b. Should each of the intermediate products, A and B, be sold as is or processed further into
an end product? Explain.
a. Analysis of the profitability of the overall operation:

b. Analysis of sell or process further:

Process Product Y further, but not Product X.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further
Level: Easy

12-239

Chapter 12 - Differential Analysis: The Key to Decision Making

153. Harris Corp. manufactures three products from a common input in a joint processing
operation. Joint processing costs up to the split-off point total $200,000 per year. The
company allocates these costs to the joint products on the basis of their total sales value at the
split-off point.
Each product may be sold at the split-off point or processed further. The additional processing
costs and sales value after further processing for each product (on an annual basis) are:

The "Further Processing Costs" consist of variable and avoidable fixed costs.
Required:
Which product or products should be sold at the split-off point, and which product or products
should be processed further? Show computations.

Product K should be sold after further processing beyond the split-off point. Products J and L
should be sold at the split-off point without any further processing.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further
Level: Medium

12-240

Chapter 12 - Differential Analysis: The Key to Decision Making

154. Iaukea Company makes two products from a common input. Joint processing costs up to
the split-off point total $49,600 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:

Required:
a. What is the net monetary advantage (disadvantage) of processing Product X beyond the
split-off point?
b. What is the net monetary 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?
a. & b.

c. & d.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 12-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further
Level: Hard

12-241