Question 1

Differential Analysis Involving Opportunity Costs

On August 1, Rantoul Stores Inc. is considering leasing building and purchasing the necessary equipment to operate retail store. Alternatively, the company could use the funds to invest in $1,000,000 of 4% U.S. Treasury bonds that mature in 15 years. The bonds could be purchased at face value. The following data have been assembled:

Cost of store equipment	$1,000,000
Life of store equipment	15 years
Estimated residual value of store equipment	$50,000
Yearly costs to operate the store, excluding
	depreciation of store equipment	$200,000
Yearly expected revenuesyears 1-6	$300,000
Yearly expected revenuesyears 7-15	$400,000

Required:

1. A differential analysis as of August 1 presenting the proposed operation of the store for the 15 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). If an amount is zero, enter "0".

	Operate Retail (Alternative 1)	Invest in Bonds (Alternative 2)	Differential Effects (Alternative 2)
Revenues	$fill in the blank 39e38fffb03e076_1	$fill in the blank 39e38fffb03e076_2	$fill in the blank 39e38fffb03e076_3
Costs:
Costs to operate store	fill in the blank 39e38fffb03e076_4	fill in the blank 39e38fffb03e076_5	fill in the blank 39e38fffb03e076_6
Cost of equipment less residual value	fill in the blank 39e38fffb03e076_7	fill in the blank 39e38fffb03e076_8	fill in the blank 39e38fffb03e076_9
Profit (loss)	$fill in the blank 39e38fffb03e076_10	$fill in the blank 39e38fffb03e076_11	$fill in the blank 39e38fffb03e076_12

2. Based on the results disclosed by the differential analysis, should the proposal be accepted?

YesNo

3. If the proposal is accepted, what would be the total estimated operating income of the store for the 15 years?

$fill in the blank 9cf5f8ff4039fca_2

Question 2

Make-or-Buy Decision

Somerset Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $57 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 41% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows:

Direct materials	$26
Direct labor	17
Factory overhead (41% of direct labor)	6.97
Total cost per unit	$49.97

If Somerset 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 16% of the direct labor costs.

a. A differential analysis dated April 30 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".

	Make Carrying Case (Alternative 1)	Buy Carrying Case (Alternative 2)	Differential Effects (Alternative 2)
Unit costs:
Purchase price	$fill in the blank 8699a3fab026f80_1	$fill in the blank 8699a3fab026f80_2	$fill in the blank 8699a3fab026f80_3
Direct materials	fill in the blank 8699a3fab026f80_4	fill in the blank 8699a3fab026f80_5	fill in the blank 8699a3fab026f80_6
Direct labor	fill in the blank 8699a3fab026f80_7	fill in the blank 8699a3fab026f80_8	fill in the blank 8699a3fab026f80_9
Variable factory overhead	fill in the blank 8699a3fab026f80_10	fill in the blank 8699a3fab026f80_11	fill in the blank 8699a3fab026f80_12
Fixed factory overhead	fill in the blank 8699a3fab026f80_13	fill in the blank 8699a3fab026f80_14	fill in the blank 8699a3fab026f80_15
Total unit costs	$fill in the blank 8699a3fab026f80_16	$fill in the blank 8699a3fab026f80_17	$fill in the blank 8699a3fab026f80_18

b. Assuming there were no better alternative uses for the spare capacity, it would

be advisablenot be advisable

to manufacture the carrying cases. Fixed factory overhead is

relevantirrelevant

to this decision.

Question 3

Differential Analysis for a Lease or Buy Decision

Laredo Corporation is considering new equipment. The equipment can be purchased from an overseas supplier for $3,080. The freight and installation costs for the equipment are $640. If purchased, annual repairs and maintenance are estimated to be $410 per year over the four-year useful life of the equipment. Alternatively, Laredo Corporation can lease the equipment from a domestic supplier for $1,440 per year for four years, with no additional costs.

A differential analysis dated March 15 to determine whether Laredo Corporation 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".

	Lease Equipment (Alternative 1)	Buy Equipment (Alternative 2)	Differential Effects (Alternative 2)
Costs:
Purchase price	$fill in the blank 44db5901f01503e_1	$fill in the blank 44db5901f01503e_2	$fill in the blank 44db5901f01503e_3
Freight and installation	fill in the blank 44db5901f01503e_4	fill in the blank 44db5901f01503e_5	fill in the blank 44db5901f01503e_6
Repair and maintenance (4 years)	fill in the blank 44db5901f01503e_7	fill in the blank 44db5901f01503e_8	fill in the blank 44db5901f01503e_9
Lease (4 years)	fill in the blank 44db5901f01503e_10	fill in the blank 44db5901f01503e_11	fill in the blank 44db5901f01503e_12
Total costs	$fill in the blank 44db5901f01503e_13	$fill in the blank 44db5901f01503e_14	$fill in the blank 44db5901f01503e_15

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

Lease the equipmentBuy the equipment

Question 4

Machine Replacement Decision

A company is considering replacing an old piece of machinery, which cost $597,000 and has $350,200 of accumulated depreciation to date, with a new machine that has a purchase price of $484,400. The old machine could be sold for $64,800. The annual variable production costs associated with the old machine are estimated to be $156,900 per year for eight years. The annual variable production costs for the new machine are estimated to be $99,700 per year for eight years.

a.1 A differential analysis dated May 29 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. If an amount is zero, enter "0". If required, use minus sign to indicate a loss.

	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effects (Alternative 2)
Revenues:
Proceeds from sale of old machine	$fill in the blank 0b5b44f8b004fb5_1	$fill in the blank 0b5b44f8b004fb5_2	$fill in the blank 0b5b44f8b004fb5_3
Costs:
Purchase price	fill in the blank 0b5b44f8b004fb5_4	fill in the blank 0b5b44f8b004fb5_5	fill in the blank 0b5b44f8b004fb5_6
Variable productions costs (8 years)	fill in the blank 0b5b44f8b004fb5_7	fill in the blank 0b5b44f8b004fb5_8	fill in the blank 0b5b44f8b004fb5_9
Profit (Loss)	$fill in the blank 0b5b44f8b004fb5_10	$fill in the blank 0b5b44f8b004fb5_11	$fill in the blank 0b5b44f8b004fb5_12

a.2 Determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine.

Continue with the old machineReplace the old machine

b. What is the sunk cost in this situation?

The sunk cost is $fill in the blank f9892bfaa037048_1.

Question 5

Lease or sell

Plymouth Company owns equipment with a cost of $650,000 and accumulated depreciation of $360,000 that can be sold for $320,000, less a 3% sales commission. Alternatively, Plymouth Company can lease the equipment for four years for a total of $360,000, at the end of which there is no residual value. In addition, the repair, insurance, and property tax expense that would be incurred by Plymouth Company on the equipment would total $35,000 over the four-year lease.

This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input answers in the questions below.

Open spreadsheet

A differential analysis on August 7 as to whether Plymouth Company should lease (Alternative 1) or sell (Alternative 2) the equipment. Use a minus sign to indicate costs or negative differential effect on income.

Differential Analysis
Lease (Alt. 1) or Sell (Alt. 2) Equipment
August 7
		Lease Equipment (Alternative 1)		Sell Equipment (Alternative 2)		Differential Effect on Income (Alternative 2)
Revenues		$ fill in the blank 2		$ fill in the blank 3		$ fill in the blank 4
Costs		fill in the blank 5		fill in the blank 6		fill in the blank 7
Profit (Loss)		$ fill in the blank 8		$ fill in the blank 9		$ fill in the blank 10

Should Plymouth Company lease (Alternative 1) or sell (Alternative 2) the machine?

Lease the machineSell the machine

Question 6

Product Pricing using the Cost-Plus Approach Methods; Differential Analysis for Accepting Additional Business

Crystal Displays Inc. recently began production of a new product, flat panel displays, which required the investment of $1,500,000 in assets. The costs of producing and selling 5,000 units of flat panel displays are estimated as follows:

Variable costs per unit:			Fixed costs:
Direct materials	$120		Factory overhead	$250,000
Direct labor	30		Selling and administrative expenses	150,000
Factory overhead	50
Selling and administrative expenses	35
Total variable cost per unit	$235

Crystal Displays Inc. is currently considering establishing a selling price for flat panel displays. The president of Crystal Displays has decided to use the cost-plus approach to product pricing and has indicated that the displays must earn a 15% return on invested assets.

Required:

Note: Round all markup percentages to two decimal places, if required. Round all costs per unit and selling prices per unit to the nearest whole dollar.

1. Determine the amount of desired profit from the production and sale of flat panel displays. $fill in the blank 204ca2f6d00efea_1

2. Assuming that the product cost method is used, determine the following:

a. Product cost amount per unit	$fill in the blank 204ca2f6d00efea_2
b. Markup percentage	fill in the blank 204ca2f6d00efea_3	%
c. Selling price per unit	$fill in the blank 204ca2f6d00efea_4

3. (Appendix) Assuming that the total cost method is used, determine the following:

a. Total cost amount per unit	$fill in the blank 204ca2f6d00efea_5
b. Markup percentage	fill in the blank 204ca2f6d00efea_6	%
c. Selling price per unit	$fill in the blank 204ca2f6d00efea_7

4. (Appendix) Assuming that the variable cost method is used, determine the following:

a. Variable cost amount per unit	$fill in the blank 204ca2f6d00efea_8
b. Markup percentage	fill in the blank 204ca2f6d00efea_9	%
c. Selling price per unit	$fill in the blank 204ca2f6d00efea_10

5. The cost-plus approach price computed above should be viewed as a general guideline for establishing long-run normal prices; however, other considerations, such as

the price of competing products and general economic conditions of the marketplacefixed costs incurred and depreciation expense

, could lead management to establish a different short-run price.

6. Assume that as of August 1, 3,000 units of flat panel displays have been produced and sold during the current year. Analysis of the domestic market indicates that 2,000 additional units are expected to be sold during the remainder of the year at the normal product price determined under the product cost method. On August 3, Crystal Displays Inc. received an offer from Maple Leaf Visual Inc. for 800 units of flat panel displays at $225 each. Maple Leaf Visual Inc. will market the units in Canada under its own brand name, and no variable selling and administrative expenses associated with the sale will be incurred by Crystal Displays Inc. The additional business is not expected to affect the domestic sales of flat panel displays, and the additional units could be produced using existing factory, selling, and administrative capacity.

a. A differential analysis of the proposed sale to Maple Leaf Visual Inc. If an amount is zero, enter "0".

	Reject Order (Alternative 1)	Accept Order (Alternative 2)	Differential Effects (Alternative 2)
Revenues	$fill in the blank 9b9f42fc0040040_1	$fill in the blank 9b9f42fc0040040_2	$fill in the blank 9b9f42fc0040040_3
Costs
Variable manufacturing costs	fill in the blank 9b9f42fc0040040_4	fill in the blank 9b9f42fc0040040_5	fill in the blank 9b9f42fc0040040_6
Profit (loss)	$fill in the blank 9b9f42fc0040040_7	$fill in the blank 9b9f42fc0040040_8	$fill in the blank 9b9f42fc0040040_9

b. Based on the differential analysis in part (a), should the proposal be accepted?

YesNo

Question 7

Make or buy

A company manufactures various-sized plastic bottles for its medicinal product. The manufacturing cost for small bottles is $59 per unit (100 bottles), including fixed costs of $13 per unit. A proposal is offered to purchase small bottles from an outside source for $32 per unit, plus $4 per unit for freight.

This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input answers in the questions below.

Open spreadsheet

A differential analysis dated January 25 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the bottles, assuming fixed costs are unaffected by the decision. If an amount is zero, enter "0". Enter unit costs as positive values. Use minus sign to indicate negative Differential Effects.

Differential Analysis
Make Bottles (Alt. 1) or Buy Bottles (Alt. 2)
January 25
		Make Bottles (Alternative 1)		Buy Bottles (Alternative 2)		Differential Effects (Alternative 2)
Unit costs:
Purchase price		$fill in the blank 2		$fill in the blank 3		$fill in the blank 4
Freight		fill in the blank 5		fill in the blank 6		fill in the blank 7
Variable costs		fill in the blank 8		fill in the blank 9		fill in the blank 10
Fixed factory overhead		fill in the blank 11		fill in the blank 12		fill in the blank 13
Total unit costs		$fill in the blank 14		$fill in the blank 15		$fill in the blank 16

Determine whether the company should make (Alternative 1) or buy (Alternative 2) the bottles.

Make the bottlesBuy the bottles

Question 8

Product Decisions Under Bottlenecked Operations

Youngstown Glass Company manufactures three types of safety plate glass: large, medium, and small. All three products have high demand. Thus, Youngstown Glass is able to sell all the safety glass that it can make. The production process includes an autoclave operation, which is a pressurized heat treatment. The autoclave is a production bottleneck. Total fixed costs are $232,000 for the company as a whole. In addition, the following information is available about the three products:

	Large		Medium		Small
Unit selling price	$367		$132		$174
Unit variable cost	(289)		(108)		(153)
Unit contribution margin	$ 78		$ 24		$ 21
Autoclave hours per unit	6		4		2
Total process hours per unit	12		8		6
Budgeted units of production	4,200		4,200		4,200

a. Determine the contribution margin by glass type and the total company operating income for the budgeted units of production.

	Large	Medium	Small	Total
Units produced	fill in the blank 1	fill in the blank 2	fill in the blank 3
Revenues	$fill in the blank 4	$fill in the blank 5	$fill in the blank 6	$fill in the blank 7
Variable costs	fill in the blank 8	fill in the blank 9	fill in the blank 10	fill in the blank 11
Contribution margin	$fill in the blank 12	$fill in the blank 13	$fill in the blank 14	$fill in the blank 15
Fixed costs				fill in the blank 16
Operating income				$fill in the blank 17

b. An analysis showing which product is the most profitable per bottleneck hour. Round the "Unit contribution margin per production bottleneck hour" amounts to the nearest cent.

	Large	Medium	Small
Contribution margin	$fill in the blank 18	$fill in the blank 19	$fill in the blank 20
Autoclave hours per unit	fill in the blank 21	fill in the blank 22	fill in the blank 23
Unit contribution margin per production bottleneck hour	$fill in the blank 24	$fill in the blank 25	$fill in the blank 26

Question 9

Decision to Discontinue a Product

On the basis of the following data, the general manager of Hawkeye Shoes Inc. decided to discontinue Children's Shoes because it reduced operating income by $30,000.

Hawkeye Shoes Inc. Product-Line Income Statement For the Year Ended November 30, 20Y8
	Children's Shoes	Men's Shoes	Women's Shoes	Total
Sales		$280,000			$300,000			$500,000		$1,080,000
Costs of goods sold:
Variable costs	$(135,000)	$(150,000)	$(220,000)	$(505,000)
Fixed costs	(45,000)	(60,000)	(120,000)	(225,000)
Total cost of goods sold	$(180,000)	$(210,000)	$(340,000)	$(730,000)
Gross profit	$100,000	$90,000	$160,000	$350,000
Selling and administrative expenses:
Variable selling and admin. expenses	$(100,000)	$(45,000)	$(95,000)	$(240,000)
Fixed selling and admin. expenses	(30,000)	(20,000)	(25,000)	(75,000)
Total selling and admin. expenses	$(130,000)	$(65,000)	$(120,000)	$(315,000)
Operating income (loss)	$(30,000)	$25,000	$40,000	$35,000

a. A differential analysis to determine the flaw in the general manager's decision. If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.

	Continue Children's Shoes (Alternative 1)	Discontinue Children's Shoes (Alternative 2)	Differential Effects (Alternative 2)
Revenues	$fill in the blank 6f2c58053079ff8_1	$fill in the blank 6f2c58053079ff8_2	$fill in the blank 6f2c58053079ff8_3
Costs:
Variable cost of goods sold	fill in the blank 6f2c58053079ff8_4	fill in the blank 6f2c58053079ff8_5	fill in the blank 6f2c58053079ff8_6
Variable selling and admin. expenses	fill in the blank 6f2c58053079ff8_7	fill in the blank 6f2c58053079ff8_8	fill in the blank 6f2c58053079ff8_9
Fixed costs	fill in the blank 6f2c58053079ff8_10	fill in the blank 6f2c58053079ff8_11	fill in the blank 6f2c58053079ff8_12
Profit (Loss)	$fill in the blank 6f2c58053079ff8_13	$fill in the blank 6f2c58053079ff8_14	$fill in the blank 6f2c58053079ff8_15

b. What is the flaw in the decision to discontinue Children's Shoes, if it is assumed fixed costs would not be materially affected by the discontinuance?

The general manager is not focusing on the differential revenues and costs.The general manager uses only fixed costs to make the decision.The general manager has failed to identify the objective of the decision.

If the children's Shoes are discontinued, the company's loss would

increasedecrease

by $fill in the blank 26ea9f02affcfd1_3

Question 10

Replace equipment

A machine with a book value of $90,500 has an estimated five-year life. A proposal is offered to sell the old machine for $50,500 and replace it with a new machine at a cost of $66,500. The new machine has a five-year life with no residual value. The new machine would reduce annual direct labor costs from $10,700 to $7,700.

This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the questions below.

Open spreadsheet

A differential analysis dated April 11 on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). If an amount is zero, enter "0". Use minus sign to indicate costs, losses, or negative differential effect on income.

Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
April 11
		Continue with Old Machine (Alternative 1)		Replace Old Machine (Alternative 2)		Differential Effects (Alternative 2)
Revenues:
Proceeds from sale of old machine		$fill in the blank 2		$fill in the blank 3		$fill in the blank 4
Costs:
Purchase price		fill in the blank 5		fill in the blank 6		fill in the blank 7
Direct labor (5 years)		fill in the blank 8		fill in the blank 9		fill in the blank 10
Profit (Loss)		$fill in the blank 11		$fill in the blank 12		$fill in the blank 13

Should the company continue with the old machine (Alternative 1) or replace the old machine (Alternative 2)?

Continue with the old machineReplace the old machine

Question 11

Target Costing

Laser Cast Inc. manufactures color laser printers. Model J20 presently sells for $250 and has a product cost of $200, as follows:

Direct materials	$140
Direct labor	40
Factory overhead	20
Total	$200

It is estimated that the competitive selling price for color laser printers of this type drop to $240 next year. Laser Cast has established a target cost to maintain its historical markup percentage on product cost. Engineers have provided the following cost-reduction ideas:

1. Purchase a plastic printer cover with snap-on assembly, rather than with screws. This will reduce the amount of direct labor by 9 minutes per unit.
2. Add an inspection step that will add six minutes per unit of direct labor but reduce the materials cost by $5 per unit.
3. Decrease the cycle time of the injection molding machine from four minutes to three minutes per part. Thirty percent of the direct labor and 40% of the factory overhead are related to running injection molding machines.

The direct labor rate is $17 per hour.

a. Determine the target cost for Model J20, assuming that the historical markup on product cost and selling price are maintained. Round your final answer to two decimal places. $fill in the blank 1 per unit

b. Determine the required cost reduction. Enter as a positive number. Round your final answer to two decimal places. $fill in the blank 2 per unit

c. Evaluate the three engineering improvements together to determine if the required cost reduction (drift) can be achieved. Enter all amounts as positive numbers. Do not round interim calculations but round your final answers to two decimal places.

1. Direct labor reduction	$fill in the blank 3	per unit
2. Additional inspection	$fill in the blank 4	per unit
3. Injection molding productivity improvement	$fill in the blank 5	per unit
Total savings	$fill in the blank 6	per unit

Question 12

Sell or Process Further

Calgary Lumber Company incurs a cost of $394 per hundred board feet (hbf) in processing certain "rough-cut" lumber, which it sells for $570 per hbf. An alternative is to produce a "finished-cut" at a total processing cost of $526 per hbf, which can be sold for $756 per hbf.

a. A differential analysis dated March 15 on whether to sell rough-cut lumber (Alternative 1) or process further into finished-cut lumber (Alternative 2).

	Sell Rough-Cut (Alternative 1)	Process Further into Finished-Cut (Alternative 2)	Differential Effects (Alternative 2)
Revenues, per 100 board ft.	$fill in the blank 407bde057fc400a_1	$fill in the blank 407bde057fc400a_2	$fill in the blank 407bde057fc400a_3
Costs, per 100 board ft.	fill in the blank 407bde057fc400a_4	fill in the blank 407bde057fc400a_5	fill in the blank 407bde057fc400a_6
Profit (Loss), per 100 board ft.	$fill in the blank 407bde057fc400a_7	$fill in the blank 407bde057fc400a_8	$fill in the blank 407bde057fc400a_9

b. Determine whether to sell rough-cut lumber (Alternative 1) or process further into finished-cut lumber (Alternative 2).

Sell rough-cut lumber.Process further and sell finished-cut lumber.