Differential Analysis Report for a Discontinued Product

The condensed product-line income statement for Porcelain Tableware Company is as follows:

PORCELAIN TABLEWARE COMPANY Product-Line Income Statement
	Bowls			Plates			Cups
Sales	$655,000			$904,000			$267,000
Cost of goods sold	(259,000)			(337,000)			(139,000)
Gross profit	$396,000			$567,000			$128,000
Selling and administrative expenses	(295,000)			(346,000)			(158,000)
Operating income (loss)	$101,000			$221,000			$(30,000)

Fixed costs are 41% of the cost of goods sold and 15% of the selling and administrative expenses. Porcelain Tableware assumes that fixed costs would not be significantly affected if the Cups line were discontinued.

a. Prepare a differential analysis report for all three products.

PORCELAIN TABLEWARE COMPANY
Product Income
Differential Analysis Report
	Bowls	Plates	Cups
Differential revenue from monthly sales:
__________________________	? $	? $	? $
Differential costs of monthly sales:
_______________________	? $	?$	?$
___________________________	? $	? $	? $
Monthly differential income from sales	? $	? $	? $

b. Which of the following statements about the Cups line is true?

The Cups line should be discontinued, because the company would increase total company income by $50,690

The Cups line should be discontinued, since the company could decrease its total fixed costs by 56%.

The Cups line should be retained, because discontinuing it has no effect on variable costs.

The Cups line should be retained, because the total income for the company would decrease by excess of differential revenue over differential cost if the Cups line is discontinued.

Q 2

Make-or-Buy Decision

Matchless Technologies Company has been purchasing carrying cases for its portable tablets at a delivered cost of $60 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	$24.00
Direct labor	17.00
Factory overhead (44% of direct labor)	7.48
Total cost per unit	$48.48

If Matchless Technologies 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 16% of the direct labor costs.

a. Prepare a differential analysis report for the make-or-buy decision. Enter your final answer as a positive amount if it represents a net cost savings; enter a negative amount if it represents an increase in cost.

MATCHLESS TECHNOLOGIES COMPANY
Manufacture Carrying Case
Differential Analysis Report
Purchase price of carrying case	___________	$
Differential cost to manufacture carrying case:
Direct materials	______________$
Direct labor	______________
Variable factory overhead ? (Cost increase) or (cost decrease ? $

b. On the basis of the data presented, would it be advisable to make the carrying cases or to continue buying them? It would be advisable (continue buying or to manufacture) the carrying cases because the (additional costs or the cost saving) would be $ ______ per unit. Fixed factory overhead is (irrelevant or relevant) since it will continue (whether the carrying cases are purchased or manufactured) or (only if the carrying cases are purchased) or (only if the carrying cases are manufactured)

.