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Differential Cost Analysis Examples

Differential Cost Analysis Examples

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Published by Muhammad azeem

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Published by: Muhammad azeem on Nov 25, 2009
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08/31/2015

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Differential cost Analysis / Decision Making
Solution of Exercise No. 01
Req: 1Differential cost between 80% level of activity and 90% level of activityNormal Capacity 90,000 units (100% level of activity)=========At 90% Level of activity(90,000 units x 90%)81,000 unitsAt 80% Level of activity(90,000 units x 80%)72,000 unitsDifferential units 9,000 unitsDifferential Cost = 9,000 units x 12 variable production costDifferential Cost = 108,000======Req: 2
Differential cost of producing 5,000 units
Additional cost incurred in fixed cost= 10,000Variable cost (5,000 units x 12)= 60,000Differential cost = 70,000=======Req: 3
Per unit cost of 95,000 units
Variable cost (95,000 units x 12)= 1,140,000Fixed Cost (240,000 + 10,000)= 250,000Total Cost incurred= 1,390,000=========Per unit cost = 1,390,000 = 14.6395,000 unitsReq: 4
Per unit differential production cost of 5,000 units
Per unit differential cost = 70,000= 145,000 units
 
Solution of Ex. 2:
Required No. 1: Average annual differential Cost for the first 5 years (includingincome tax):Cost of merchandise = 385,000Depreciation of equipment= 30,000Marketing Expenses= 10,000Differential ware house rent= 25,000Cost excluding Income Tax= 450,000Amount of Income Tax:Sales revenue= 500,000Less: Cost of sales = (450,000)INCOME = 50,000Income Tax (50,000 x 46%)= 23,000AVERAGE ANNUAL DIFFERENTIAL COST FORTHE FIRST 5 YEARS= 473,000========Required No. 2: Minimum Annual net incomeMinimum Annual net income = (Investment in the proposal / 2) x rate of return= (Rs. 150,000 / 2) = Rs. 75,000 x 11%= Rs. 8,250=======Required No.3: Estimated annual differential income:Differential Sales revenue= 500,000Less: Differential cost (including income tax) = 473,000Rate of return required= 8,250= (481,250)ESTIMATED ANNUAL DIFFERENTIALINCOME= 18,750=========Required No. 4: Estimated Cash flow during third year:
Cash Inflows:
Sales revenue= Rs. 500,000
Cash Outflows:
Differential Cost= 473,000Less: Non Cash expenses:Depreciation Exp.= (30,000)= Rs. 443,000ESTIMATED CASH INFLOW DURING THIRD YEAR= Rs. 57,000===========
 
Solution of Ex. 3
ABC CompanyProjected Income StatementFor the period ended ---
Sales(5,000 kgs. X 1.80)= 9,000Less: Cost of goods sold:
Direct material used 
(0.6 + 0.01 = 0.61 x 5,000 kgs.) = 3,050
Direct Labor used 
(0.5 x 5000 kgs.) = 2,500
Factory Overhead – Variable Cost 
:Indirect labor (0.2 x 5,000 kgs.)= 1,000Power (0.02 x 5,000 kgs.)= 100Supplies (0.02 x 5,000 kgs.)= 100Maintenance andRepair (0.027 x 5,000 kgs.)= 135Insurance (0.007 x 5,000 kgs.) = 35Additional Cost incurred to accept an order Additional payroll taxes= 210Depreciation on new machine(3,000 / 24 months)= 125= 335 = 1,705COST OF GOODS SOLD= (7,255)
Gross margin to accept an order = 1,745=======
Note:
All per unit rates are calculated on the basis of 30,000 units.

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