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Differential Analysis and Product Pricing

23-3

A condensed income statement by product line for Nordic Beverage Inc. indicated the following for Diet Kola for the past year.

Sales $486,000
Cost of Goods Sold 258,000
Gross Profit $228,000
Operating expenses 260,000
Loss from operations $ (32,000)

It is estimated that 20% of the cost of goods sold represents fixed factory over-head costs and that 25% of the operating expenses are fixed. Since Diet Kola is only one of many products, the fixed costs wll not be materially affected if the product is discontinued.

a. Prepare a differential analysis report, dated January 3, 2006 for the proposed discontinuance of the Diet Kola.
b. Should diet Kola be retained? Explain

23-6

Advent Computer Company has been purchasing carrying cases for its portable computers ata delivered cost of $51 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 40% of direct labor cost. The fully absorbed unit costs to produce comparable carrying cases are expected to be:

Direct materials $20.00
Direct Labor 24.00
Factory overhead (40% of direct labor) 9.60
Total cost per unit $53.60

If Advent 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 25% of the direct labor costs.

a. Prepare a differential analysis report, dated June 5, 2006, for the make-or-buy decision.
b. On the basis of the data presented, would it be advisable to make the carrying cases or to continue buying them? Explain

Solution Summary

Excel file contains a differential analysis report for the proposed discontinuance of the product.

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