Transparency Master 24(9)-1
DIFFERENTIAL ANALYSIS
Summer Job Offers
You have been offered two different jobs for the upcoming summer. Since both are full-time positions,
you must choose to work only one of the jobs.
The first job is in an office. The pay will be $320 per
week. The office is located 20 miles from your home,
so you estimate that you will spend $25 per week on
gas. You will also have to pay $25 per week for parking. Because you are required to dress professionally,
you will need to purchase some new clothes. You estimate that you will spend $350 on new clothes for this
job during the summer.
The second job is at an amusement park. The pay will
be $220 per week. The amusement park is also 20
miles from your home, but you can carpool with a
friend. Your share of the gas will be $12.50 per week.
There is no charge for parking. The amusement park
will furnish you with a uniform, so you won't need to
buy any special clothes.
Assuming that your summer break will allow you to
work 12 weeks, which job will provide you with more
money?
Transparency Master 24(9)-2
DIFFERENTIAL ANALYSIS
Summer Job Offers
Solution
Office Job
Revenue
Costs
Net advantage of office job
1
($320 × 12)
2
($25 × 12) + ($25 × 12) + $350
3
($220 × 12)
4
($12.50 × 12)
$3,8401
Amusement
Park
Differential
Job
$2,6403
$1,200
-9502
-1504
-400
$2,890
$2,490
$400
Transparency Master 24(9)-3
DIFFERENTIAL ANALYSIS
Solution to Handout 24(9)-1, Problem 1
Differential cost of leasing:
Lease payments
($18,000  5) .........................
Maintenance............................
Differential cost of purchasing:
Purchase price........................
Repairs, maintenance, insurance, and property tax ........
Net advantage of purchase
alternative ...............................
$
$
90,000
8,000
$
98,000
75,000
20,000
95,000
$
3,000
Transparency Master 24(9)-4
DIFFERENTIAL ANALYSIS
Solution to Handout 24(9)-1, Problem 1
(in Tabular Format)
Lease
Option 1
Costs
Maintenance
Total
Purchase
Option 2
$90,000
$75,000
8,000
20,000
$ 98,000
$95,000
Differential
Effect on
Alternative 2
-$3000
Badonsky should purchase the gear-cutting machine for an estimated
savings of $3,000.
Transparency Master 24(9)-5
DIFFERENTIAL ANALYSIS
Solution to Handout 24(9)-1, Problem 2
Make Part
Alternative 1
Buy Part
Alternative 2
Differential
Effect on
Income
(Alternative 1)
Costs:
Purchase price
$0
-$1,220,0004
-$1,220,000
Direct materials
-500,0001
500,000
Direct labor
-600,0002
600,000
Variable factory overhead
-175,0003
175,000
Income (loss)
-$1,275,000
Grayson should buy the part.
1
($5.00 × 100,000)
2
($6.00 × 100,000)
3
($1.75 × 100,000)
4
($12.50 × 100,000) – $30,000
-$1,220,000
-$ 55,000
Transparency Master 24(9)-6
DIFFERENTIAL ANALYSIS
Solution to Handout 24(9)-1, Problem 3
Sell Apples
Alternative 1
Revenues
Additional Costs
Income (loss)
(24 × $1.50)
2
($6.00 × 100,000)
Differential
Effect on
Income
Alternative 2
$15.00
$36.001
$21.00
$0
-$18.002
-$18.00
$15.00
$18,00
$ 3.00
Apple Valley should further process.
1
Process
Further into
Apple Butter
Alternative 2
Transparency Master 24(9)-7
DIFFERENTIAL ANALYSIS
Solution to Handout 24(9)-1, Problem 4
Reject Order
Alternative 1
Revenues
Accept Order
Alternative 2
Differential
Effect on
Income
Alternative 2
$0
$1.50
Direct materials
0
.80
Direct labor
0
.25
0
Variable factory overhead
0
.30
0
$0
$ .15
$ .15
Income (loss)
Gooding Foods should accept the special order.
$1.50
Transparency Master 24(9)-8
WRITING EXERCISE
1. A diversified food company is considering the closing of its
condiment division. What qualitative factors should be
considered before discontinuing a division or product line?
2. An automobile manufacturer has decided to allow outside
suppliers to bid on all parts necessary to make its vehicles.
What qualitative factors should be considered by management in deciding whether or not to turn over the production
of a part to an outside supplier?
3. What are the qualitative factors you might consider when
determining whether or not to replace your car?
Transparency Master 24(9)-9
DETERMINING A PRODUCT'S
SELLING PRICE
The following costs were incurred to make 10,000 units of a
product:
Variable manufacturing costs ...................
Variable selling and administrative
expenses .................................................
Fixed factory overhead costs ....................
Fixed selling and administrative
expenses .................................................
$5 per unit
$2 per unit
$80,000
$30,000
This company wishes to price its product so it will make a profit
of $27,000 if all 10,000 units are sold.
Transparency Master 24(9)-10
DETERMINING A PRODUCT'S
SELLING PRICE
Solution
Product Cost Method:
Markup Percentage
Product Cost
=
$27,000 + $2(10,000) + $30,000
$5(10,000) + $80,000
=
$77,000
$130,000
=
$5 + ($80,000/10,000) = $13
Product Selling Price =
$13 + $13(0.592)
= 59.2%
= $20.70
Transparency Master 24(9)-11
Bottleneck Production Environments
Solution to Handout 24(9)–2
a.
Contribution margin
per unit
Drying hours per unit
Margin per constraint
hour
Spaghetti Elbows
Shells
$10
 0.50
$12
 0.25
$15
 0.10
$20.00
$48.00
$150.00
The shells are the most profitable item because they return $150 of margin for every hour in the constraint. It is not appropriate to consider only
the contribution margins when there is a constraining resource. The relative profitability per constraint hour is the appropriate measure of profitability.
b.
Units of production
Spaghetti
6,000
Elbows
4,000
Shells
Total
12,000
Revenues
$150,000 $120,000 $420,000
Less variable costs
90,000
72,000 240,000
Contribution margin $ 60,000 $ 48,000 $180,000
Less fixed costs
Profit
$690,000
402,000
$288,000
100,000
$188,000
The production of shells requires only .1 hours per unit. Therefore, the
shell production can be increased by 10,000 units (1,000 hours  .10
hours) if spaghetti sales drop by 2,000 units and release 1,000 hours
(2,000 units  .50 hours) of constraint capacity.
(Continued)
Transparency Master 24(9)-12
Bottleneck Production Environments
Solution to Handout 24(9)–2
(Concluded)
c.
Margin per constraint
hour (shells)
=
Price (spag.) – VC (spag.)
Drying hours per unit
X – $15 per unit
.50 hours per unit
$150
=
$ 75
=
X – $15 per unit
X
=
$90 per unit for spaghetti
Transparency Master 24(9)-13
DETERMINING A PRODUCT'S
SELLING PRICE
Solution
Variable Cost Method:
Markup Percentage
=
$27,000 + $30,000 + $80,000
$5(10,000) + $2(10,000)
=
$137,000
$70,000
= 195.7%
=
$5
+ $2
= $7
Product Selling Price =
$7
+ $7(1.957)
= $20.70
Product Cost