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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
V
ariable conversion cost per unit………………
…
$180 $165 $150
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
÷
Furnace (bottleneck) hours per unit…………
…
4 3 2.5
The Good Grade steel has the largest contribution margin per unit ($21); however,
the Regular grade has the largest contribution margin per furnace hour ($8).
Thus, using production bottleneck analysis indicates that the Regular Grade is
actually more profitable at a $8.00 contribution margin per furnace hour than
High Grade’s $2.50 or Good Grade’s $7.00 contribution margin per furnace hour.
Therefore, the company would want to sell product in the following preference
order:
1. Regular Grade
3. High Grade
* ** ***
24-36
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:
Costs to operate warehouse –2,450,000 02,450,000
1
(7 yrs. × $280,000) + (7 yrs. × $240,000)
2
5% × $740,000 × 14 years
3.
Total estimated revenue from operating warehouse……
…
$3,640,000
Total estimated expenses to operate warehouse:
Costs to operate warehouse, excluding depreciation
…
$2,450,000
Cost of warehouse equipment less residual value…… 665,000 3,115,000
Differential Analysis
Operate Warehouse (Alt. 1) or Invest in Bonds (Alt. 2)
July 1
12
3
24-37
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
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.
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?
After considering such factors as those listed above, the net cost reduction
anticipated over the six-year period may not be sufficient to justify the
Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
November 8
24-38
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:*
Direct materials –133,000 –224,000 –91,000
Direct labor –56,000 –84,000 –28,000
Variable factory overhead –49,000 –35,000 14,000
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
12
24-39
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,
Differential Analysis
Sell Ingot (Alt. 1) or Process Further into Rolled Aluminum (Alt. 2)
February 5
12
24-40
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
Fixed factory overhead………………………………………………………
…
180,000
Total Selling and Administrative Expenses
Desired Profit +
Total Manufacturing Costs
$520,000 + $180,000
b. Markup Percentage =
$60,000 + $80,000 + ($7 × 10,000 units)
=
24-41
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
= 7.06%
c. Cost amount per unit………………………………………………………
…
$85
4. (Appendix)
a. Variable cost amount per unit: $59.00
Total variable costs: $59 × 10,000 units = $590,000
= 54.24% (rounded)
c. Cost amount per unit………………………………………………………
…
$59
5. The cost-plus approach price of $91 should be viewed as a general guideline for
24-42
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
1
24-43
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
V
ariable conversion cost per unit………………
…
$40 $40 $30
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
****
24-44
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,
Varden’s manager can contribute to fixed costs by accepting the order. However,
there are some additional considerations the manager must consider before
accepting this order.
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
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
CASES & PROJECTS
CHAPTER 24 Differential Analysis and Product Pricing
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
Cost of room supplies (soap, paper, etc.)……………………………………………
…
8
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
staffed to demand. Likewise, the air conditioning and lights can be turned off if
the room is not rented for the night, saving most of the utility cost. The desk staff
24-46
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
computer model be treated as an incremental decision. However, 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
the required profit markup. This would yield a target cost of $1,000 ($1,250 ÷
1.25), which is $200 lower than the present product cost. The new target cost
should be established as a cost reduction target. The company should
CHAPTER 24 Differential Analysis and Product Pricing
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
Crew salaries…………………………………………………… F
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
Advertising……………………………………………………
…
F
*Depends on contract terms with software vendor
24-48
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
portion of variable cost to total cost for an airline flight will be much smaller
24-49
