1. a. Differential revenue is the amount of increase or decrease in revenue expected from a
p
articular course of action compared with an alternative.
2. The differential income and costs of the lease option should be compared against selling the building.
The differential revenue would be the lease revenue compared to the proceeds from sale. The
p
4. A business should only accept business at a special price if the lower price will not contaminate the
regular pricing for other customers or induce other customers to demand the special price. In
5. It would be reasonable to purchase from the supplier if the fixed cost per unit was less than 50 cents.
6. Some of the financial considerations include the profitability of the store, including all the revenues
and the variable and fixed costs associated with the store because they would all be differential to the
7. In the long run, the normal selling price must be set high enough to cover all costs (both fixed an
d
variable) and provide a reasonable amount for profit.
CHAPTER 24 (FIN MAN); CHAPTER 9 (MAN)
DIFFERENTIAL ANALYSIS AND PRODUCT PRICING
DISCUSSION QUESTIONS
24-1
CHAPTER 24 Differential Analysis and Product Pricing
DISCUSSION QUESTIONS (Continued)
9. The target cost concept begins with a price that can be sustained in the marketplace, then
subtracts a target profit, thus determining the target cost. The cost is made to conform to the
p
rice required in the market. In contrast, under cost plus, a markup is added to the cost. The
24-2
b
CHAPTER 24 Differential Analysis and Product Pricing
PE 24–1A (FIN MAN); PE 9–1A (MAN)
Differential
Lease Sell Effect
Machine Machine on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues $272,000 $262,000 –$10,000
*
$262,000 × 5%
Claxon Company should lease the machine.
PE 24–1B (FIN MAN); PE 9–1B (MAN)
Differential
Lease Sell Effect
Equipment Equipment on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues $84,600 $82,000 –$2,600
Differential Analysis
Lease Equipment (Alt. 1) or Sell Equipment (Alt. 2)
March 23
PRACTICE EXERCISES
Differential Analysis
Lease Machine (Alt. 1) or Sell Machine (Alt. 2)
January 12
CHAPTER 24 Differential Analysis and Product Pricing
PE 24–2A (FIN MAN); PE 9–2A (MAN)
Differential
Continue Discontinue Effect
Product TS-20 Product TS-20 on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenue $102,000 $ 0 –$102,000
Costs:
PE 24–2B (FIN MAN); PE 9–2B (MAN)
Differential
Continue Discontinue Effect
Product B Product B on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenue $39,500 $ 0 –$39,500
Costs:
Variable cost of goods sold –25,500 0 25,500
Differential Analysis
Continue Product B (Alt. 1) or Discontinue Product B (Alt. 2)
May 9
Differential Analysis
Continue Product TS-20 (Alt. 1) or Discontinue Product TS-20 (Alt. 2)
September 12
24-4
CHAPTER 24 Differential Analysis and Product Pricing
PE 24–3A (FIN MAN); PE 9–3A (MAN)
Differential
Make Buy Effect
Bread Bread on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Unit costs:
Purchase price $ 0 –$110 –$110
Delivery 0 –15 –15
PE 24–3B (FIN MAN); PE 9–3B (MAN)
Differential
Make Buy Effect
Bottles Bottles on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Unit costs:
Purchase price $ 0 –$35 –$35
Differential Analysis
Make Bottles (Alt. 1) or Buy Bottles (Alt. 2)
March 30
Differential Analysis
Make Bread (Alt. 1) or Buy Bread (Alt. 2)
August 16
CHAPTER 24 Differential Analysis and Product Pricing
PE 24–4A (FIN MAN); PE 9–4A (MAN)
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 $ 84,000 $ 84,000
Costs:
The company should replace the old machine.
PE 24–4B (FIN MAN); PE 9–4B (MAN)
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 $50,500 $50,500
Costs:
Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
April 11
Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
February 18
24-6
CHAPTER 24 Differential Analysis and Product Pricing
PE 24–5A (FIN MAN); PE 9–5A (MAN)
Process Differential
Sell Further into Effect
Product T Product U on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues, per unit $7.10 $8.00 $0.90
PE 24–5B (FIN MAN); PE 9–5B (MAN)
Process Differential
Sell Further into Effect
Product D Product E on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues, per unit $36 $43 $7
Differential Analysis
Sell Product D (Alt. 1) or Process Further into Product E (Alt. 2)
February 26
Differential Analysis
Sell Product T (Alt. 1) or Process Further into Product U (Alt. 2)
August 2
PE 24–6A (FIN MAN); PE 9–6A (MAN)
Differential
Reject Accept Effect
Order Order on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues, per unit $0.00 $42.00 $42.00
Costs:
Variable manufacturing costs, per unit 0.00 –30.00 –30.00
PE 24–6B (FIN MAN); PE 9–6B (MAN)
Differential
Reject Accept Effect
Order Order on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues, per unit $0.00 $7.20 $7.20
Costs:
Variable manufacturing costs, per unit 0.00 –5.00 –5.00
Differential Analysis
Reject Order (Alt. 1) or Accept Order (Alt. 2)
March 16
Differential Analysis
Reject Order (Alt. 1) or Accept Order (Alt. 2)
October 23
24-8
CHAPTER 24 Differential Analysis and Product Pricing
PE 24–7A (FIN MAN); PE 9–7A (MAN)
PE 24–7B (FIN MAN); PE 9–7B (MAN)
PE 24–8A (FIN MAN); PE 9–8A (MAN)
Product A Product B
Unit contribution margin……………………………………………
…
$24 $30
PE 24–8B (FIN MAN); PE 9–8B (MAN)
Product K Product L
…
Desired Profit + Selling and Admin. Exp.
Total Product Cost
Markup percentage on product cost:
Markup percentage on product cost: Desired Profit + Selling and Admin. Exp.
Total Product Cost
24-9
CHAPTER 24 Differential Analysis and Product Pricing
Ex. 24–1 (FIN MAN); Ex. 9–1 (MAN)
a.
Differential
Lease Sell Effect
Machinery Machinery on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues $216,000 $221,000 $5,000
b. Sell the machinery. The net gain from selling is $8,150.
Ex. 24–2 (FIN MAN); Ex. 9–2 (MAN)
Note to Instructors: This differential analysis is a “lease or buy ” decision, which is from
Differential
Lease Buy Effect
Equipment Equipment on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Costs:
Purchase price $ 0 –$3,900 –$3,900
Freight and installation 0 –515 –515
EXERCISES
Differential Analysis
Lease Equipment (Alt. 1) or Buy Equipment (Alt. 2)
August 4
Differential Analysis
Lease Machinery (Alt. 1) or Sell Machinery (Alt. 2)
April 16
1
24-10
CHAPTER 24 Differential Analysis and Product Pricing
Ex. 24–3 (FIN MAN); Ex. 9–3 (MAN)
a.
Differential
Continue Discontinue Effect
Star Cola Star Cola on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues $390,000 $ 0 –$390,000
Costs:
Variable cost of goods sold –147,200 0 147,200
Variable operating expenses –178,500 0 178,500
Differential Analysis
Continue Star Cola (Alt. 1) or Discontinue Star Cola (Alt. 2)
January 21
1
2
24-11
CHAPTER 24 Differential Analysis and Product Pricing
Ex. 24–4 (FIN MAN); Ex. 9–4 (MAN)
a.
Differential
Continue Discontinue Effect
Cups Cups on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues $31,300 $ 0 –$31,300
Costs:
Variable cost of goods sold –14,280 0 14,280
Variable selling and admin.
b. The Cups line should be retained. As indicated by the differential analysis in part (a),
the income will decrease by $7,000 if the Cups line is discontinued.
Differential Analysis
Continue Cups (Alt. 1) or Discontinue Cups (Alt. 2)
March 31, 2016
1
24-12
CHAPTER 24 Differential Analysis and Product Pricing
Ex. 24–5 (FIN MAN); Ex. 9–5 (MAN)
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 Services” segment serves the retail customer, you and me.
These are the brokerage, Internet, and mutual fund services used by individual
b. Variable costs in the “Investor Services” segment include:
2. Fees paid to exchanges for executing trades
4. Advertising
Fixed costs in the “Investor Services” segment include:
2. Depreciation on brokerage office equipment, such as computers and
computer networks
3. Property taxes on brokerage offices
c. Investor Institutional
Services Services
(in millions) (in millions)
Income from operations……………………………………… $ 865 $514
d. If one assumes that the fixed costs that serve institutional investors (computers,
servers, and facilities) would not be sold but would be used by the other sector,
24-13
CHAPTER 24 Differential Analysis and Product Pricing
Ex. 24–6 (FIN MAN); Ex. 9–6 (MAN)
The flaw in the decision is the failure to focus on the differential revenues and
Continue Discontinue Differential
Children’s Children’s Effect
Shoes Shoes on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues $235,000 $ 0 –$235,000
Costs:
Ex. 24–7 (FIN MAN); Ex. 9–7 (MAN)
a.
Make Buy Differential
Carrying Carrying Effect
Case Case on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Costs:
Purchase price $ 0.00 –$70.00 –$70.00
Direct materials per unit –45.00 0.00 45.00
b. Assuming there were no better alternative uses for the spare capacity, it would
Differential Analysis
Make Carrying Case (Alt. 1) or Buy Carrying Case (Alt. 2)
July 19
Differential Analysis
Continue Children’s Shoes (Alt. 1) or Discontinue Children’s Shoes (Alt. 2)
24-14
CHAPTER 24 Differential Analysis and Product Pricing
Ex. 24–8 (FIN MAN); Ex. 9–8 (MAN)
a.
Lay Out Purchase Differential
Pages Layout Effect
Internally Services on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Costs:
Purchase price of layout work $ 0 –$312,000 –$312,000
Salaries –224,000 0 224,000
Benefits –36,000 0 36,000
b. The benefit from using an outside service is shown to be $8,000 greater
than performing the layout work internally. The fixed costs (depreciation
expenses) in the budget are irrelevant to the decision. Thus, the work should
be purchased from the outside on a strictly financial basis.
Differential Analysis
Lay Out Pages Internally (Alt. 1) or Purchase Layout Services (Alt. 2)
February 22
*
24-15
CHAPTER 24 Differential Analysis and Product Pricing
Ex. 24–9 (FIN MAN); Ex. 9–9 (MAN)
a.
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 $231,000 $231,000
Costs:
The company should replace the old machine.
b. The sunk cost is the $250,000 book value ($600,000 cost less $350,000 accumulated
Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
September 13
24-16
CHAPTER 24 Differential Analysis and Product Pricing
Ex. 24–10 (FIN MAN); Ex. 9–10 (MAN)
a.
Continue Replace Differential
with Old Old Effect
Machine Machine on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues:
Sales (5 years)* $1,025,000 $1,025,000 $ 0
Costs:
Purchase price 0 –180,000 –180,000
Direct materials (5 years)* –360,000 –360,000 0
b. The proposal should not be accepted.
c. In addition to the factors given, consideration should be given to such factors
as: Do both present and proposed operations provide the same capacity?
Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
May 4
24-17
CHAPTER 24 Differential Analysis and Product Pricing
Ex. 24–11 (FIN MAN); Ex. 9–11 (MAN)
Process Differential
Sell Further into Effect
Rough Cut Finished Cut on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues, per 100 board ft. $611 $748 $137
Ex. 24–12 (FIN MAN); Ex. 9–12 (MAN)
a.
Process
Sell Further into Differential
Regular Decaf Effect
Columbian Columbian on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues $55,320 $67,716 $12,396
b. The differential revenue from processing further to Decaf Columbian is more
Sell Regular Columbian (Alt. 1) or Process Further into Decaf Columbian (Alt. 2)
October 6
Differential Analysis
Sell Rough Cut (Alt. 1) or Process Further into Finished Cut (Alt. 2)
June 14
Differential Analysis
12
34
24-18
CHAPTER 24 Differential Analysis and Product Pricing
Ex. 24–12 (FIN MAN); Ex. 9–12 (MAN) (Concluded)
c. The price of Decaf Columbian would need to decrease to $11.50 per pound
in order for the differential analysis to yield neither an advantage nor a
disadvantage (indifference). This is determined as follows:
The price of Decaf Columbian would need to be $0.38 lower, or $11.50, to
yield no net differential income or loss. This is verified by the following
differential analysis:
Sell Differential
Regular Effect
Columbian on Income
(Alternative 1) (Alternative 2)
Revenues $55,320 $10,230
Further into
Process
October 6
Differential Analysis
Sell Regular Columbian (Alt. 1) or Process Further into Decaf Columbian (Alt. 2)
(Alternative 2)
Decaf Columbian
$65,550
*
24-19
CHAPTER 24 Differential Analysis and Product Pricing
Ex. 24–13 (FIN MAN); Ex. 9–13 (MAN)
a.
Differential
Reject Accept Effect
Order Order on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues $0 $576,000 $576,000
b. The additional units can be sold for $32 each, and because unused capacity is
available, the only costs that would be added if this additional production
c. $29.01. Any selling price above $29 (variable costs per unit) will produce a
positive contribution margin.
Ex. 24–14 (FIN MAN); Ex. 9–14 (MAN)
Total costs…………………………………………………………………………
…
$375,000
Differential Analysis
Reject Order (Alt. 1) or Accept Order (Alt. 2)
November 12
1