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CHAPTER 12
DIFFERENTIAL ANALYSIS AND
PRODUCT PRICING
CLASS DISCUSSION QUESTIONS
1. a. Differential revenue is the amount of
increase or decrease in revenue ex–
tial cost.
2. This decision is an example of a make-or-buy
3. The differential income and costs of the
lease option should be compared against
should also be considered in the analysis.
4. Assuming there is demand for the premium-
5. A business should only accept business at a
special price if the lower price will not con-
offering discount business to a customer
that may wish to order in the future.
$1.60 ($7.75 – $6.15). That is, if the elimi-
plier and the effect on future relationship and
other business with the supplier.
7. One financial consideration is the profitability
value of the equipment and land (either in
tive alternative.
8. In the long run, the normal selling price must
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10. In setting prices, managers should also
conform to the price required in the market. In
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EXERCISES
E12–1
a. ORWELL INDUSTRIES
Proposal to Lease or Sell Machinery
Differential Analysis Report
E12–2
a. GARCIA BEVERAGES INC.
Proposal to Discontinue Melon Cola
Differential Analysis Report
Differential revenue from annual sales of Melon Cola:
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E12–3
a.
DINNER WARE COMPANY
Product Income
Differential Analysis Report
Bowls Plates Cups
Differential revenue from monthly sales:
Computations:
1$900,000 × (1.0 – 0.40) = $540,000
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E12–4
Note to Instructors: Many students may be unfamiliar with the financial services
industry. This exercise provides an opportunity to introduce students to some
basic terms and concepts used within the industry.
a. The “Investor (Retail) Services” segment serves the retail customer, meaning
b. Variable costs in the “Investor (Retail) Services” segment include:
c.
Investor
(Retail) Advisor
Services Services
Operating income before taxes ……………… $1,681 $598
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E12–5
The flaw in the decision was the failure to focus on the differential revenues and
costs, which indicate that operating income would be reduced by $85,000 if Child-
ren’s Sandals is discontinued. This differential income from sales of Children’s
Sandals can be determined as follows:
E12–6
a. WATTS TECHNOLOGIES COMPANY
Manufacture Carrying Case
Differential Analysis Report
Purchase price of carrying case ……………………………. $ 6.50
Differential cost to manufacture carrying case:
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E12–7
a. WISCONSIN ARTS OF MILWAUKEE
Purchase Outside Page Layout Services
Differential Analysis Report
Differential revenue:
Residual value of computer equipment ……………………. $ 6,500
Differential cost of alternatives:
b. The benefit from using an outside service is shown to be $11,500 greater than
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E12–8
a. Annual variable costs—old equipment ………………….. $ 30,000
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E12–9
a. LONE WOLF TECHNOLOGIES
Replace Machine
Differential Analysis Report
Annual costs and expenses—present machine ………………………….. $ 865,000
b. The proposal should be accepted.
E12–10
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E12–11
a. BOZEMAN COFFEE COMPANY
Process Columbian Coffee Further
Differential Analysis Report
Differential revenue from further processing per batch:
b. The differential revenue from processing further to Decaf Columbian is more
c. The price of Decaf Columbian would need to decrease to $9.02 per pound in
order for the differential analysis to yield neither an advantage nor a disad-
vantage (indifference). This is determined as follows: