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Differential Analysis and Product Pricing


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


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.