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Differential Analysis: Net Income, Fixed Costs, and Processing

Part A:
The luggage department of ABC store has annual revenues of $1,000,000, variable costs of $300,000, direct fixed costs (like special store fixtures, and per square foot rent) of $500,000, and allocated indirect fixed costs of $400,000 (like management salaries and insurance). What would be the effect on total net income if you eliminated the department?

What if you could use all of the direct fixed costs and put in a pottery department with estimated sales of $2,000,000, variable costs of $1,300,000, and your allocated indirect costs were estimated at $500,000. Should you do it? (Not clear of the step process)

Part B:
Your manufacturing company is currently operating at 80% capacity and you make 8,000 units per month. Variable costs are $50 per unit. Company A approaches you and offers to buy 2,000 additional units per month at $60. Company B offers you $70 for an additional 1,400 units, and Company C offers you $75 for an additional 1,000 units. In all cases your fixed costs will not be affected. Which offer should you accept, if any?

Part C:
The marketing department of Buckstar coffee estimates the following monthly demand for a new tea product you are going to offer:
A. 10,000 cups at $1.25 per cup
B. 8,000 cups at $1.50 per cup
C. 6,000 cups at $1.75 per cup
D. 4,000 cups at $2.00 per cup
E. 2,000 cups at $2.25 per cup
Fixed costs are $5,000 per month and are not affected by your choice. Variable costs are $.25 per cup. Which of the above prices should you choose, if any?

Part D:
DEF Manufacturing Company makes two joint products, product XXX and product YYY. At the split-off point, product XXX has a sales value of $20 and product YYY has a sales value of $15. DEF can either sell both products now or process them further. If they do the additional processing, they can sell the products for $35 and $25 respectively. Product XXX would cost an additional $12 for further processing and product YYY would cost an additional $11. Should further processing be done on either of these products? Why or why not?

Solution Summary

This solution addresses several aspects of differential analysis such as the total net income, fixed and variable costs, and further processing.