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CHAPTER 24 Differential Analysis and Product Pricing
Prob. 24–6A (FIN MAN); Prob. 9–6A (MAN)
1. High Good Regular
Grade Grade Grade
Selling price……………………………………………
…
$280 $270 $250
2. The contribution margin per unit may give false signals when an organization
has production bottlenecks. Instead, Hercules should use the contribution margin
per bottleneck hour to determine relative product profitability, as follows:
High Good Regular
Grade Grade Grade
Contribution margin per unit………………………… $10 $21 $20
24-35
CHAPTER 24 Differential Analysis and Product Pricing
Prob. 24–1B (FIN MAN); Prob. 9–1B (MAN)
1.
Differential
Operate Invest in Effect
Warehouse Bonds on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues $3,640,000 $518,000 –$3,122,000
Costs:
3. Total estimated revenue from operating warehouse………
…
$3,640,000
Total estimated expenses to operate warehouse:
Differential Analysis
Operate Warehouse (Alt. 1) or Invest in Bonds (Alt. 2)
July 1, 2014
12
24-36
CHAPTER 24 Differential Analysis and Product Pricing
Prob. 24–2B (FIN MAN); Prob. 9–2B (MAN)
1.
Continue Replace Differential
with Old Old Effect
Machine Machine on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues:
Proceeds from sale of old machine $ 0 $12,900 $12,900
Costs:
Note: Revenues and nonmanufacturing operating expenses are not affected by the
decision to replace the old machine, and thus are not included in the analysis. If they
2. Other factors to be considered include the following:
a. Are there any improvements in the quality of work turned out by the new
machine?
b. What effect does the federal income tax have on the decision?
c. What opportunities are available for the use of the $44,100 of funds
($57,000 less $12,900 proceeds from the old machine) that are required to
purchase the new machine?
Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
November 8, 2014
24-37
CHAPTER 24 Differential Analysis and Product Pricing
Prob. 24–3B (FIN MAN); Prob. 9–3B (MAN)
1.
Differential
Promote Promote Effect
Tennis Shoe Walking Shoe on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues $595,000 $700,000 $105,000
Costs:*
Sole Mates Inc. should promote tennis shoes.
2. The sales manager’s tentative decision should be opposed. The sales
manager erroneously considered the full unit costs instead of the differential
Differential Analysis
Promote Tennis Shoe (Alt. 1) or Promote Walking Shoe (Alt. 2)
June 19, 2014
12
24-38
CHAPTER 24 Differential Analysis and Product Pricing
Prob. 24–4B (FIN MAN); Prob. 9–4B (MAN)
1.
Process
Further into Differential
Sell Rolled Effect
Ingot Aluminium on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues, per ton $88,000 $140,800 $52,800
2. International Aluminum Co. should decide to process aluminum ingot further, rather
Differential Analysis
Sell Ingot (Alt. 1) or Process Further into Rolled Aluminum (Alt. 2)
February 5, 2014
12
24-39
CHAPTER 24 Differential Analysis and Product Pricing
Prob. 24–5B (FIN MAN); Prob. 9–5B (MAN)
1. $60,000 ($600,000 × 10%)
2. a. Total manufacturing costs:
V
ariable ($52* × 10,000 units)…………………………………………………
…
$520,000
c. Cost amount per unit…………………………………………………………… $70
b. Markup Percentage =
Total Selling and Administrative Expenses
Desired Profit +
Total Manufacturing Costs
24-40
CHAPTER 24 Differential Analysis and Product Pricing
Prob. 24–5B (FIN MAN); Prob. 9–5B (MAN) (Continued)
3. (Appendix)
a. Total costs:
V
ariable ($59 × 10,000 units)…………………………………………………
…
$590,000
Desired Profit
Total Costs
c. Cost amount per unit…………………………………………………………
…
$85
4. (Appendix)
c. Cost amount per unit…………………………………………………………
…
$59
5. The cost-plus approach price of $91 should be viewed as a general guideline for
Desired Profit + Total Fixed Costs
Total Variable Costs
b.
b. Markup Percentage =
Markup Percentage =
24-41
CHAPTER 24 Differential Analysis and Product Pricing
Prob. 24–5B (FIN MAN); Prob. 9–5B (MAN) (Concluded)
6. a.
Differential
Reject Accept Effect
Order Order on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues $0 $91,200 $91,200
Costs
Differential Analysis
Reject Order (Alt. 1) or Accept Order (Alt. 2)
September 5, 2014
1
24-42
CHAPTER 24 Differential Analysis and Product Pricing
Prob. 24–6B (FIN MAN); Prob. 9–6B (MAN)
1. Ethylene Butane Ester
Selling price……………………………………………
…
$170 $155 $130
2. The contribution margin per unit may give false signals when an organization
has production bottlenecks. Instead, Wilmington Chemical Company should use
the contribution margin per bottleneck hour to determine relative product
profitability as follows:
Ethylene Butane Ester
Contribution margin per unit………………………… $15 $27 $15
24-43
CHAPTER 24 Differential Analysis and Product Pricing
CP 24–1 (FIN MAN); CP 9–1 (MAN)
No, it would be unethical for Aaron to attend the meeting. Such a meeting
CP 24–2 (FIN MAN); CP 9–2 (MAN)
The contribution margin is $4 ($22 – $18) per dozen on the special order. Thus,
1. Have we ever done business overseas? Exports require additional
2. Will the customer sell the golf balls overseas, or will they re-label the golf
balls and have them imported back into the United States? Such a situation
3. Is it likely that other customers will learn of the “special deal” the overseas
company received and demand equal treatment? That is, is there a risk that
we’ll spoil the pricing structure in the domestic market?
4. Will the overseas customer want to do business in the future, or is this just a
single sale? If the overseas customer is expected to purchase more golf balls
5. Is there a possibility of another customer being willing to purchase the golf
balls at the $35 price? If so, Varden may not want to commit capacity to the
6. Will we help the overseas customer establish a presence in the overseas golf
ball market where we may wish to compete in the future?
CASES & PROJECTS
24-44
CP 24–3 (FIN MAN); CP 9–3 (MAN)
First, Marriott has excess capacity for this day, so it should be willing to accept
additional customers. The Priceline.com customer generates incremental revenue
that will not reduce other business. Given this, however, the price must at least
cover variable cost, or else Marriott will incur a loss. The variable cost per room
night is shown below.
Housekeeping labor cost………………………………………………………………… $38
These costs are mostly avoidable, or variable to room nights. This answer
assumes that the maid and laundry staff hours are highly flexible and can be
Note to Instructors: There could be some discussion about the degree that some
of these costs are fully variable. For example, it’s likely that some utility cost
24-45
CHAPTER 24 Differential Analysis and Product Pricing
CP 24–4 (FIN MAN); CP 9–4 (MAN)
a. Juanita believes that the fixed costs should be treated as a sunk cost and
ignored in the pricing decision. In essence, Juanita is suggesting that the new
b. Target costing provides a different perspective to the pricing issue. Under
target costing, Diamond Computer Company should begin with the price the
market is willing to pay, which is $1,250. This price should then be reduced by
24-46
CP 24–5 (FIN MAN); CP 9–5 (MAN)
a. This activity is designed to have students access a number of products and
services on the Internet to see their commercial potential. Each of the listed
sites will provide product descriptions and pricing.
The list of costs in the products will not be determined at the Internet site but
must be assumed. Some examples include:
Delta Air Lines—Airline tickets Fixed or Variable?
Fuel………………………………………………………………
…
V
Assume that the activity base is the number of passenger miles for
determining fixed and variable costs. Employee salaries for an airline
are relatively fixed, and only become variable when there are significant
changes to the flight schedule.
Amazon.com—Books Fixed or Variable?
Cost of books (purchased for resale)……………………… V
Assume that the activity base is the number of books sold for determining
fixed and variable costs.
Dell Inc.—Personal computers Fixed or Variable?
Cost of computers (dl, dm, and foh)………………………
…
V (mostly)
Web page design and programming………………………
…
F
24-47
CHAPTER 24 Differential Analysis and Product Pricing
CP 24–5 (FIN MAN); CP 9–5 (MAN) (Concluded)
b. The product with the largest markup on variable cost is the airline ticket. The
24-48
