Assignment in Differential Analysis

Name___________________________________ Section:______________ Date: ___________ Score:_________

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

1) Only future costs that differ between alternatives are relevant in decision making. 1)

2) Future costs that do not differ between the alternatives in a decision are avoidable 2)
costs.

3) The book value of a machine, as shown on the balance sheet, is not relevant in a 3)
decision concerning the replacement of that machine by another machine. (Ignore
taxes.)

4) A cost that is relevant in one decision may not be relevant in another decision. 4)

5) Opportunity costs are not usually recorded in the accounts of a business. 5)

6) A cost that can be avoided by choosing one alternative over another is not relevant for 6)
decision purposes.

7) The book value of old equipment is a relevant cost in a decision to replace that 7)
equipment. (Ignore taxes.)

8) An avoidable cost is a cost that can be completely eliminated irrespective of whether 8)

one chooses one alternative or another in a decision.

9) A fixed cost cannot be a differential cost. 9)

10) One of the advantages of allocating common fixed costs to a product is that such 10)
allocations more accurately reflect the product's true profitability.

11) In a decision to drop a product, the product should not be charged for factory rent if the 11)
space in which the product is produced has no alternative use and the rental payment is
unavoidable.

12) A disadvantage of vertical integration is that by pooling demand for parts from a 12)
number of companies, a supplier will face diseconomies of scale that result in lower
quality and higher cost than if every company makes its own parts.

13) The split-off point in a process that produces joint products is the point in the 13)
manufacturing process at which the joint products are sent to separate customers.

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 14) Joint costs are relevant in the decision to sell a product at the split-off point or to 14)
process the product further.

15) Joint products are products that are sold to customers as a set or as part of a group of 15)
products.

Short Problems: Write your answer on a separate sheet of paper. Show your solutions.

16) Narciso Corporation is preparing a bid for a special order that would require 880 liters of material
R19S. The company already has 280 liters of this raw material in stock that originally cost $6.10
per liter. Material R19S 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 $5.45 per liter. New stocks of the
material can be readily purchased for $6.20 per liter. What is the relevant cost of the 880 liters of
the raw material when deciding how much to bid on the special order?

17) Wenig Inc. has some material that originally cost $73,500. The material has a scrap value of
$45,600 as is, but if reworked at a cost of $6,600, it could be sold for $58,100. 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?

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18) Ramon Corporation makes 18,000 units of part E44 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:

Per Unit
Direct materials $2.20
Direct labor $5.40
Variable manufacturing overhead $8.00
Supervisor's salary $7.30
Depreciation of special equipment $6.60
Allocated general overhead $1.80

An outside supplier has offered to make and sell the part to the company for $23.30 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. In addition, the space used to produce part E44 would be used to
make more of one of the company's other products, generating an additional segment margin of
$21,000 per year for that product.
What would be the impact on the company's overall net operating income of buying part E44 from
the outside supplier?

19) Kosakowski Corporation processes sugar beets in batches. A batch of sugar beets costs $66 to buy
from farmers and $17 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 $23 or processed
further for $13 to make the end product industrial fiber that is sold for $36. The beet juice can be
sold as is for $42 or processed further for $20 to make the end product refined sugar that is sold for
$84. How much more profit (loss) does the company make by processing one batch of sugar beets
into the end products industrial fiber and refined sugar?

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20) Yukon Perfume Corporation manufactures three distinct perfumes (I, II, and III) from a single joint
process. The three perfumes can be sold to discount stores in the form they are in at the split-off
point. However, if the perfumes are further processed, they can be sold to specialty stores. Costs
related to each batch of perfume separation is as follows:

Perfume I Perfume II Perfume III

Sales value at split-off point $1,500 $800 $900
Allocated joint costs $1,000 $1,000 $1,000
Sales value after further processing $3,500 $2,500 $2,000
Cost of further processing $1,600 $1,400 $500

For which product(s) above would it be more profitable for Yukon to sell after further processing
rather than at the split-off point?