Keenan Music $--$ Differential Analysis Case

Before the recent proposal of the Specialty Guitar Project, Keenan Music had two product lines that include Acoustic Guitar and Electric Guitar. The company

sold $25,000$ acoustic and $15,000$ electric guitars. The segmented income statement for the company as a whole appears below.

While Keenan Music is making a profit of over $$1$ million, it appears that Electric is not making a profit as a product line. Keenan Music has been trying

different strategies to improve Electric Guitar's profit, but the line continues to make a loss. The CFO of Keenan Music has asked the accountant to consider

dropping the electric product line. If the product line were dropped, the traceable fixed expenses for Electric would be eliminated, but none of the common

fixed expenses would be affected. The equipment used in the production was purchased long time ago and will have no other use or can be sold.While the Company is pondering about the fate of the Electric Guitar, another local company approached Keenan Music and offered to make the

$2$ Electric Guitar for them with a selling price of $$285.$ Based on the current cost information above, the accountant figured out the full cost of making

and selling one Electric Guitar to be $$342\mathrm{.}58,$ as presented below. It appears that the purchasing the electric guitars will help improve the

same way; hence, the variable selling and administrative expenses and the advertising expense will not be affected. However, they will no longer

need to design the electric guitars so the product design expense can be avoided. Also, as stated above, the equipment used in the production was

purchased long time ago and will have no other use of can be sold. Finally, the common fixed expenses will not be affected if Keenan purchases the

electric guitars.

The number of Electric Guitars needed is

The selling price offered by the local company is

What are the Relevant Cost Per Unit, Total Relevant Cost for $15,000$ guitars, and Total Purchase Cost for $15,000$ guitars, if Keenan

Music stops making the Electric Guitar and purchases from the local company?

Direct Materials

Direct Labor

Variable S & A Expenses

Variable MOH

Depreciation of Equipment

Advertising Expense

Product Design Expense

Common Fixed Expenses

Total

Total Relevant Cost for $15,000$ guitars

Total Purchase Cost for $15,000$ guitars

Cost Difference

Purchasing the Electric Guitars from the local company wi

Should Keenan Music purchase the Electric Guitars?