CHAPTER 24 Differential Analysis and Product Pricing
Ex. 24–15 (FIN MAN); Ex. 9–15 (MAN)
a.
Differential
Reject Accept Effect
Order Order on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues $0 $2,320,000 $2,320,000
Costs:
Direct materials 0 –1,120,000 –1,120,000
Direct labor 0 –440,000 –440,000
Variable factory overhead 0 –300,000 –300,000
Variable selling and admin.
1
20,000 tires × $116 per tire
2
20,000 tires × $56 per tire
3
20,000 tires × $22 per tire
Brightstone should accept the special order from Euro Motors.
Differential Analysis
Reject Order (Alt. 1) or Accept Order (Alt. 2)
January 21
1
2
3
4
24-21
CHAPTER 24 Differential Analysis and Product Pricing
Ex. 24-16 (FIN MAN); Ex. 9–16 (MAN)
a. Contribution margin per room night:
Rate per room night $180
Variable costs per room night:
Housekeeping service 23
b. The discount price should be set greater than the variable costs per room
night so that the resulting contribution margin contributes to fixed costs and
profitability. Thus, the price should be greater than $33. The fixed costs are not
24-22
CHAPTER 24 Differential Analysis and Product Pricing
Ex. 24–17 (FIN MAN); Ex. 9–17 (MAN)
a. Desired profit = $250,000 × 22% = $55,000
b. Cost amount (product cost) per unit: $32,000 ÷ 800 units = $40.00
d. Cost amount (product cost) per unit……………………………………………
…
$ 40.00
Ex. 24–18 (FIN MAN); Ex. 9–18 (MAN)
a. Desired profit = $1,200,000 × 30% = $360,000
b. Cost amount (product cost) per unit: $2,500,000* ÷ 10,000 units = $250
*($215 manufacturing variable cost per unit × 10,000 units) + $350,000 manfacturing
fixed cost
…
Desired Profit +
c. Total Selling and Administrative Expenses
Total Manufacturing Costs
Markup Percentage =
24-23
CHAPTER 24 Differential Analysis and Product Pricing
Ex. 24–19 (FIN MAN); Ex. 9–19 (MAN)
a. The price will be set at the estimated market price required to remain
competitive, or $27,000. Under the target cost concept, the market dictates
the price, not the markup on cost.
b. The required profit margin of 20% of the estimated $27,000 price implies a
$21,600 target product cost as follows:
Target Product Cost = $27,000 – ($27,000 × 20%)
24-24
CHAPTER 24 Differential Analysis and Product Pricing
Ex. 24–20 (FIN MAN); Ex. 9–20 (MAN)
$460 – $230
$230
$230
b. Required cost reduction: $230 – $200 = $30
$30
60 min.
Direct material reduction: 20.00 17.00
3. Injection molding productivity improvement:
a.
=
Historical markup percentage on product cost: = 100%
50% of selling priceor,
1.c.
Direct labor reduction:
× 15 min. =
$ 7.50
24-25
CHAPTER 24 Differential Analysis and Product Pricing
Ex. 24–21 (FIN MAN); Ex. 9–21 (MAN)
Determine the contribution margin per furnace hour as follows:
Revenue……………………………………
…
$43,000 $49,000 $56,500
V
ariable cost………………………………
…
34,000 28,000 26,500
Contribution margin……………………… $ 9,000 $21,000 $30,000
÷ Divide by number of units……………
…
5,000 units 5,000 units 5,000 units
Unit contribution margin………………… $ 1.80 $ 4.20 $ 6.00
Unit contribution margin
per furnace hour*………………………
…
$ 0.30 $ 0.70 $ 0.50
*Calculated as follows:
$1.80
6 hours
$6.00
12 hours
Type 5 Type 10 Type 20
Type 5: = $0.30 per furnace hour
Type 20: = $0.50 per furnace hour
24-26
CHAPTER 24 Differential Analysis and Product Pricing
Ex. 24–22 (FIN MAN); Ex. 9–22 (MAN)
a. Large Medium Small Total
Units produced…………………
…
3,000 3,000 3,000
Revenues………………………… $552,000 $480,000 $300,000 $1,332,000
b. The Small glass product is the most profitable in a bottleneck operation,
demonstrated as follows:
24-27
CHAPTER 24 Differential Analysis and Product Pricing
Ex. 24–23 (FIN MAN); Ex. 9–23 (MAN)
a. Total costs:
Desired Profit
Total Costs
…
…
Ex. 24–24 (FIN MAN); Ex. 9–24 (MAN)
a. Total variable costs: ($240 × 10,000 units)…………………………………
…
$2,400,000
Cost amount per unit: $2,400,000 ÷ 10,000 units = $240
*
$1,200,000 × 30% = $360,000
c. Cost amount per unit……………………………………………………………
…
$240
…
Desired Profit + Total Fixed Costs
Total Costs
b.
b. Markup percentage =
Markup percentage =
24-28
CHAPTER 24 Differential Analysis and Product Pricing
Prob. 24–1A (FIN MAN); Prob. 9–1A (MAN)
1.
Operate Differential
Retail Invest in Effect
Store Bonds on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues $1,264,000 $172,800 –$1,091,200
Costs:
3. Total estimated revenue from operating store………
…
$1,264,000
Total estimated expenses to operate store:
Costs to operate store, excluding depreciation…
…
$928,000
Differential Analysis
Operate Retail Store (Alt. 1) or Invest in Bonds (Alt. 2)
October 1
PROBLEMS
12
24-29
CHAPTER 24 Differential Analysis and Product Pricing
Prob. 24–2A (FIN MAN); Prob. 9–2A (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 $ 29,700 $ 29,700
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 were included, both alternatives would include them, causing the differential
2. Other factors to be considered include:
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 $90,000 of funds ($119,700 less
$29,700 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 replacement.
Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
April 30
24-30
CHAPTER 24 Differential Analysis and Product Pricing
Prob. 24–3A (FIN MAN); Prob. 9–3A (MAN)
1.
Differential
Promote Promote Effect
Moisturizer Perfume on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues $1,210,000 $1,200,000 –$10,000
Costs:*
Direct materials –198,000 –280,000 –82,000
Direct labor –66,000 –100,000 –34,000
Parisian should promote moisturizer.
2. The sales manager’s tentative decision should be opposed. The sales manager
erroneously considered the full unit costs instead of the differential (additional)
Differential Analysis
Promote Moisturizer (Alt. 1) or Promote Perfume (Alt. 2)
August 21
12
24-31
CHAPTER 24 Differential Analysis and Product Pricing
Prob. 24–4A (FIN MAN); Prob. 9–4A (MAN)
1.
Process
Further into Differential
Sell Raw Refined Effect
Sugar Sugar on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues, per batch $58,800 $73,920 $15,120
2. Dominican Sugar Company should not process raw sugar further to produce
Differential Analysis
Sell Raw Sugar (Alt. 1) or Process Further into Refined Sugar (Alt. 2)
March 24
12
24-32
CHAPTER 24 Differential Analysis and Product Pricing
Prob. 24–5A (FIN MAN); Prob. 9–5A (MAN)
1. $225,000 ($1,500,000 × 15%)
2. a. Total manufacturing costs:
V
ariable ($200* × 5,000 units)……………………………………………… $1,000,000
Fixed factory overhead……………………………………………………
…
250,000
…
Total Selling and Administrative Expenses
Desired Profit +
Total Manufacturing Costs
$1,250,000
b. Markup Percentage =
$225,000 + $150,000 + ($35 × 5,000 units)
=
24-33
CHAPTER 24 Differential Analysis and Product Pricing
Prob. 24–5A (FIN MAN); Prob. 9–5A (MAN) (Continued)
3. (Appendix)
a. Total costs:
V
ariable ($235 × 5,000 units)…………………………………………
…
$1,175,000
Fixed ($250,000 + $150,000)…………………………………………
…
400,000
Total…………………………………………………………………………
…
$1,575,000
4. (Appendix)
a. Variable cost amount per unit: $235
Total variable costs: $235 × 5,000 units = $1,175,000
c. Cost amount per unit……………………………………………………… $235
5. The cost-plus approach price of $360 should be viewed as a general guideline
for establishing long-run normal prices. Other considerations, such as the price
b. Markup Percentage =
Desired Profit + Total Fixed Costs
Total Variable Costs
24-34
CHAPTER 24 Differential Analysis and Product Pricing
Prob. 24–5A (FIN MAN); Prob. 9–5A (MAN) (Concluded)
6. a.
Differential
Reject Accept Effect
Order Order on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues $0 $180,000 $180,000
Costs:
Differential Analysis
Reject Order (Alt. 1) or Accept Order (Alt. 2)
August 3
24-35