ACCT 202
Chapter 11 Differential Analysis
Quiz
Chapter 11: Differential Analysis for Decision Making
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Solutions
Questions 1 (Class): The Ryan Company has 400 obsolete desk calculators that are carried in
inventory at a total cost of $26,800. If these calculators are upgraded at a total cost of $10,000,
they can be sold for a total of $30,000. As an alternative, the calculators can be sold in their
present condition for $11,200.
The sunk cost in this situation is: $26,800
What is the net advantage or disadvantage to the company from upgrading the calculators?
A. $8,800 advantage
B. $18,000 disadvantage
C. $20,000 advantage
D. $8,000 disadvantage
Questions 2 (Group): The Sarah Company reported the following results last year for the
manufacture and sale of one of its products known as a Tam.
Sarah Company is trying to determine whether or not to discontinue the manufacture and sale of
Tams. The operating results reported above for last year are expected to continue in the
foreseeable future if the product is not dropped. The fixed advertising expense is the cost to
advertise Tams. The fixed manufacturing overhead represents the costs of production facilities
and equipment that the Tam product shares with other products produced by Sarah. If the Tam
product were dropped, there would be no change in the fixed manufacturing costs of the
company.
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Assume that discontinuing the manufacture and sale of Tams will have no effect on the sale of
other product lines. If the company discontinues the Tam product line, the change in annual
operating income (or loss) should be:
A. $55,000 decrease
B. $65,000 decrease
C. $90,000 decrease
D. $70,000 increase
The company will save the following costs if it discontinues the Tam product line:
390,000 + 65,000 + 275,000 + 25,000 = 755,000
The company will lose the sales of $845,000 if it discontinues the Tam product line.
The net change (difference) will be 90,000 loss.
Therefore, the company should continue to produce Tams.
3. (Class) Jack Corporation makes three products that use compound W, the current constrained
resource. Data concerning those products appear below:
Rank the products in order of their current profitability from most profitable to least profitable.
In other words, rank the products in the order in which they should be emphasized.
A. UT,RC,DQ
B. DQ,RC,UT
C. RC,DQ,UT
D. UT,DQ,RC
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4. (Group) An automated turning machine is the current constraint at Anthony Corporation.
Three products use this constrained resource. Data concerning those products appear below:
Rank the products in order of their current profitability from most profitable to least profitable.
In other words, rank the products in the order in which they should be emphasized.
A. DK,BG,QU
B. DK,QU,BG
C. QU,BG,DK
D. BG,QU,DK
5. (Class) Liz Inc. is considering whether to continue to make a component or to buy it from an
outside supplier. The company uses 16,000 of the components each year. The unit product cost
of the component according to the company's cost accounting system is given as follows:
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Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 30% is
avoidable if the component were bought from the outside supplier. In addition, making the
component uses 1 minutes on the machine that is the company's current constraint. If the
component were bought, this machine time would be freed up for use on another product that
requires 2 minutes on the constraining machine and that has a contribution margin of $8.10 per
unit.
When deciding whether to make or buy the component, what cost of making the component
should be compared to the price of buying the component?
A. $20.60
B. $17.52
C. $24.65
D. $21.57
Avoidable cost (cost saved) if the company ‘buys’ the component from an outside supplier: 8.10
+ 6.40 + 1.70 + (4.40 x 30%) = $17.52
Extra incremental benefit from ‘freed’ constraint: $8.10 divided by 2 minutes: $4.05
Total cost saving and benefit if the company ‘buys’: 17.52 + 4.05 = $21.57
6. (Group) Part J88 is used in one of Aaron Corporation's products. The company makes 3,000
units of this part each year. The company's Accounting Department reports the following costs of
producing the part at this level of activity:
An outside supplier has offered to produce this part and sell it to the company for $32.10 each. If
this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor,
can be avoided. The special equipment used to make the part was purchased many years ago and
has no salvage value or other use. The allocated general overhead represents fixed costs of the
entire company. If the outside supplier's offer were accepted, only $3,000 of these allocated
general overhead costs would be avoided.
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If management decides to buy part J88 from the outside supplier rather than to continue making
the part, what would be the annual impact on the company's overall net operating income?
A. Net operating income would decline by $22,200 per year.
B. Net operating income would decline by $16,200 per year.
C. Net operating income would decline by $5,400 per year.
D. Net operating income would decline by $19,200 per year.
Relevant cost:
If purchased, the saving will be $7.70 + $6.00 + 8.00 + 7.60 + $1.00 = $30.3
Compare $30.3 savings to $32.1 cost to purchase: the difference is $1.80 decrease if purchased.
$1.80 x 3,000 units = $5,400 decrease in operating income.
Net advantage (disadvantage):
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Questions 7-8 (Group): Special Order
Sopisa Inc. manufactures industrial components. One of its products, which is used in the
construction of industrial air conditioners, is known as K65. Data concerning this product are
given below:
The above per unit data are based on annual production of 4,000 units of the component. Direct
labor can be considered to be a variable cost.
7. (Group) The company has received a special, one-time-only order for 500 units of component
K65. There would be no variable selling expense on this special order and the total fixed
manufacturing overhead and fixed selling and administrative expenses of the company would not
be affected by the order. Assuming that Sopisa has excess capacity and can fill the order without
cutting back on the production of any product, what is the minimum price per unit on the special
order below which the company should not go?
A. $180
B. $38
C. $59
D. $78
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8. (Group) The company has received a special, one-time-only order for 500 units of component
K65. There would be no variable selling expense on this special order and the total fixed
manufacturing overhead and fixed selling and administrative expenses of the company would not
be affected by the order. However, assume that Sopisa has no excess capacity and this special
order would require 10 minutes of the constraining resource, which could be used instead to
produce products with a total contribution margin of $11,000. What is the minimum price per
unit on the special order below which the company should not go?
A. $60
B. $81
C. $100
D. $22
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