Differential Analysis - Three Scenarios Assignment

xlsx

School

Concordia University *

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Course

230

Subject

Accounting

Date

Apr 3, 2024

Type

xlsx

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Uploaded by dogsuga

Current Dirt Mountain Racing $ 300,000 $ 90,000 $ 150,000 $ 60,000 $ 120,000 $ 27,000 $ 60,000 $ 33,000 $ 180,000 $ 63,000 $ 90,000 $ 27,000 $ 30,000 $ 10,000 $ 14,000 $ 6,000 $ 23,000 $ 6,000 $ 9,000 $ 8,000 $ 35,000 $ 12,000 $ 13,000 $ 10,000 $ 60,000 $ 18,000 $ 30,000 $ 12,000 $ 148,000 $ 46,000 $ 66,000 $ 36,000 $ 32,000 $ 17,000 $ 24,000 $ (9,000) *Allocated on the basis of sales dollars. $ (115,000) Better or worse off? Worse Current Difference $ 300,000 $ - $ (300,000) $ 120,000 $ - $ 120,000 $ 180,000 $ - $ (180,000) $ 30,000 $ - $ 30,000 $ 23,000 $ 23,000 $ - $ 35,000 $ - $ 35,000 $ 60,000 $ 60,000 $ - $ 148,000 $ 83,000 $ 65,000 $ 32,000 $ (83,000) $ (115,000) $ (115,000) *Allocated on the basis of sales dollars. Alternative approach: Lost Contribution Margin from Racing Bikes $ (180,000) Avoidable Costs (Saved Fixed Expenses) Advertising $ 30,000 Salaies product line $ 35,000 Total Avoidable Costs $ 65,000 Net Difference $ (115,000) Differential Analysis - Add or Drop a Segment The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for the past quarter follow: Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* Total fixed expenses Net operating income (loss) Management is concerned about the continued losses shown by the racing bikes and wants a recommendation as to whether or not the line should be discontinued. The special equipment used to produce racing bikes has no resale value and does not wear out. What is the impact on net operating income by discontinuing racing bikes? By how much would the company be better/worse off? Complete the analysis below to determine your answer. Total if Racing Dropped Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* Total fixed expenses Net operating income (loss)

Per Unit 15,000 units per year Direct Materials $ 14 $ 210,000 Direct Labor $ 10 $ 150,000 Variable Manufacturing Overhead $ 3 $ 45,000 $ 6 $ 90,000 Fixed Manufacturing Overhead (general) $ 9 $ 135,000 Total cost $ 42 $ 630,000 * 1/3 supervisory salary, 2/3 depreciation of special equipment Total for 15,000 units 15000 MAKE BUY MAKE BUY Cost of purchasing $ 35 $ 525,000 Direct materials $ 14 $ 210,000 Direct labor $ 10 $ 150,000 VMOH $ 3 $ 45,000 FMOH, traceable $ 6 $ 90,000 FMOT, common $ 9 $ 135,000 Total Costs $ 42 $ 35 $ 630,000 $ 525,000 Make Buy Cost of Product $ 630,000 $ 525,000 Opportunity Cost (foregone segment margin) $ 150,000 Total Cost $ 780,000 $ 525,000 Difference in favor of buying: $ 255,000 Differential Analysis - Make vs. Buy Troy Engines manufactures a variety of engines for use in heavy equipment. The company has always produced all the necessary parts for its engines, including the carburetors. An outside supplier has offered to sell Troy a carburetor for a cost of $35 per unit. To evaluate this offer, Troy has gathered the following information regarding its own cost of producing the carburetors internally. Fixed Manufacturing Overhead (traceable) * Assuming that the company has no alternative use for the facilities that are now being used to produce the carburetors, should the outside supplier's offer be accepted? Show all computations. Per Unit Differential Costs Suppose that if the carburetors were purchased, Troy could use the freed capacity to launch a new product. The segment margin of the new product would be $150,000 per year. Should Troy accept the offer to buy the carburetors for $35 per unit? Show all computations. Should the outside offer be accepted, given that there are no alternative uses for the facilities?

$ 75 55 30 $ 160 Required: Per Unit Total for 50 Coins 50 Incremental revenue $ 179 $ 8,950 Incremental costs: Variable costs: Direct materials $ 75 $ 3,750 Direct labor $ 55 $ 2,750 $ 30 $ 1,500 Special material $ 2 $ 100 Total variable cost $ 162 $ 8,100 Fixed costs: Purchase of special tool $ 350 Total incremental cost $ 8,450 Incremental net operating income $ 500 Sure if they want an extra $500 Differential Analysis - Special Order Patriots Manufacturing is considering a special order for 50 hand-made gold coins for a customer. The normal selling price of a gold coin is $199 and its unit product cost is $160 as shown below: Direct materials Direct labor Manufacturing overhead Unit product cost Most of the manufacturing overhead is fixed and unaffected by variations in how many coins are produced in any given period. However, $5 of the overhead is variable with respect to the number of coins produced. The customer who is interested in the gold coins would like special engraving applied to the coins. This engraving would require additional materials costing $2 per coin and would also require acquisition of a special engraving tool costing $350 that would have no other use once the special order is completed. This order would have no effect on the company’s regular sales and the order could be fulfilled using the company’s existing capacity without affecting any other order. What effect would accepting this order have on the company’s net operating income if a special selling price of $179 per coin is offered for this order? Variable manufacturing overhead

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