1-

Differential Analysis for a Discontinued Product

The condensed product-line income statement for Porcelain Tableware Company for the month of May is as follows:

Porcelain Tableware Company Product-Line Income Statement For the Month Ended May 31
	Bowls			Plates			Cups
Sales	$65,100			$89,400			$27,700
Cost of goods sold	27,000			33,000			14,600
Gross profit	$38,100			$56,400			$13,100
Selling and administrative expenses	30,400			34,200			14,600
Income from operations	$7,700			$22,200			$(1,500)

Fixed costs are 17% of the cost of goods sold and 38% of the selling and administrative expenses. Porcelain Tableware assumes that fixed costs would not be materially affected if the Cups line were discontinued.

a. Prepare a differential analysis dated May 31 to determine if Cups should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis
Continue Cups (Alt. 1) or Discontinue Cups (Alt. 2)
For the Month Ended May 31
	Continue Cups (Alternative 1)	Discontinue Cups (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$	$	$
Costs:
Variable cost of goods sold
Variable selling and admin. expenses
Fixed costs
Income (Loss)	$	$	$

b. Should the Cups line be retained? Explain.

As indicated by the differential analysis in part (a), the income will by $ if the Cups line is discontinued.

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Make-or-Buy Decision

Matchless Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $61 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 44% of direct labor cost. The fully absorbed unit costs to produce comparable carrying cases are expected to be as follows:

Direct materials	$26
Direct labor	21
Factory overhead (44% of direct labor)	9.24
Total cost per unit	$56.24

If Matchless Computer Company manufactures the carrying cases, fixed factory overhead costs will not increase and variable factory overhead costs associated with the cases are expected to be 12% of the direct labor costs.

a. Prepare a differential analysis dated February 24 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the carrying case. If required, round your answers to two decimal places. If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis
Make Carrying Case (Alt. 1) or Buy Carrying Case (Alt. 2)
February 24
	Make Carrying Case (Alternative 1)	Buy Carrying Case (Alternative 2)	Differential Effect on Income (Alternative 2)
Sales Price	$	$	$
Costs:
Purchase price	$	$	$
Direct materials per unit
Direct labor per unit
Variable factory overhead per unit
Fixed factory overhead per unit
Income (Loss)	$	$	$

b. Assuming there were no better alternative uses for the spare capacity, it would to manufacture the carrying cases. Fixed factory overhead is to this decision.

3-

Differential Analysis for a Lease-or-Buy Decision

Urban Styles Corporation is considering new equipment. The equipment can be purchased from an overseas supplier for $3,000. The freight and installation costs for the equipment are $660. If purchased, annual repairs and maintenance are estimated to be $430 per year over the four-year useful life of the equipment. Alternatively, Urban Styles can lease the equipment from a domestic supplier for $1,360 per year for four years, with no additional costs.

Prepare a differential analysis dated December 11 to determine whether Urban Styles should lease (Alternative 1) or purchase (Alternative 2) the equipment. (Hint: This is a lease-or-buy decision, which must be analyzed from the perspective of the equipment user, as opposed to the equipment owner.) If an amount is zero, enter "0".

Differential Analysis
Lease Machine (Alt. 1) or Buy Machine (Alt. 2)
December 11
	Lease Machine (Alternative 1)	Buy Machine (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$0	$0	$0
Costs:
Purchase price	$	$	$
Freight and installation
Repair and maintenance (4 years)
Lease (4 years)
Income (Loss)	$	$	$

Determine whether Urban Styles should lease (Alternative 1) or buy (Alternative 2) the equipment.