ASSIGNMENT 2- Midterm Period

DIFFERENTIAL ANALYSIS SHORT PROBLEMS

1. An employee of Meagan Corporation found some partially completed units of Model X

in a dusty corner of the warehouse.  A job ticket attached to the units indicates that a total of
P750 in manufacturing costs have been used to bring the materials to this point in the
manufacturing process.  The units can be sold in their current condition for P275 to a scrap
metal dealer.  If Meagan spends P250 to complete the units, they could be sold for P600.  

A. What should Meagan do? Why?

Meagan Corporation should complete the units for P250 because they will make a profit
of P350 which is greater to P275 if they will sell the units for P600.

B. Identify the sunk cost, if any.

The sunk cost is P750 which is the manufacturing costs that have been used to bring the
materials to the manufacturing process. This costs is already been spent and which cannot be
recovered regardless Meagan Corporation sell or finishes the units.

2. FiTch, Inc. has purchased a new server and must decide what to do with the old one. The cost
of the old server was originally P60,000 and has been depreciated P45,000. The company has
received two offers. One offer was to lease the equipment for P7,000 for the next five years, but
the company will be required to provide maintenance and insurance totaling P3,000 per year.
The other offer was made to purchase the equipment outright for P18,500 less a 5% sales
commission. Which offer should FiTCh, Inc., accept?

Prepare a differential analysis report to support your answer.

Value of benefit received under offer 1: cost(1-% sales commission)

= 18500 (1-.05)

= 18500*.95

= $ 17575

Value of benefit under offer 2 :[Revenue -cost ]*number of years

= [7000-3000]*5

= 4000*5

= 20000

since the benefit under offer2 is higher ,offer 2 should be accepted that to lease the older server.
3. GuRL Corp. is considering selling its old popcorn machine and replacing it with a newer one.
The old machine has a book value of P5,000, and its remaining useful life is five years. Annual
costs are P4,000. A high school is willing to buy it for P2,000. New equipment would cost
P18,000 with annual operating costs of P1,500. The new machine has an estimated useful life of
five years. 

Should the machine be replaced? Prepare a differential analysis report to support your
answer.  

Differential Analysis: Continue (Alternative 1) or Replace (Alternative 2) Old Machine

Alternative 1 Alternative 2 Differential Effects

Revenues:
Proceeds from sale of P 0 P 2,000 P 2,000
old machine
Cost:
Purchase price 0 (18,000) (18,000)
Variable 4,000 x 5yrs 1,500 x 5yrs 12,500
manufacturing cost (5 (20,000) (7,500)
years)
Profit (loss) P (20,000) P (23,500) P (3,500)

Based on the differential analysis, the GuRL Corporation should not replace their machine.
Replacing the machine will have a loss of 23,500, which is 3,500 higher than the loss incurred
when the company choose to continue to use the machine.

4. Product JO is one of the many products manufactured and sold by Bayside Company. An
income statement by product line for the past year indicated a net profit for Product JO of
P2,750. This net profit resulted from sales of P275,000, cost of goods sold of P186,500, and
operating expenses of P85,750. It is estimated that 30% of the cost of goods sold represents fixed
factory overhead costs and that 40% of the operating expense is fixed. If Product JO is retained,
the revenue, costs, and expenses are not expected to change significantly from those of the
current year. Because of the large number of products manufactured, the total fixed costs and
expenses are not expected to decline significantly if Product JO is discontinued.

Should the company continue or discontinue producing Product JO? Prepare a differential
analysis report to support your answer.

Based on the differential analysis, the Bayside Company should be continue producing
Product JO because if it is discontinue the fixed cost will still occur even though the variable
costs are not.
 Differential Analysis: Continue (Alternative 1) or Discontinue (Alternative 2)
producing Product JO

Alternative 1 Alternative 2 Differential Effect

Sales P 275,000 P 0 P (275,000)
Variable Cost [(186,500x (100-.30)) 0 182,000
+ (85,750x (100-.40))]

182,000
Fixed Cost [(186,500x (30/100)) + 90,500 0
(85,750x (40/100))]

90,500

5. Paper Roses Boutique has been approached by the community college to make special polo
shirts for the faculty and staff. The college is willing to buy 4,000 polos with its own design for
P6.00 each. The company normally sells its shirts for P12.00 each. The company has enough
excess capacity to make this order. A breakdown of the costs is as follows:

 
  Direct materials P2.00

  Direct labor 0.50

  Variable factory overhead 1.50

  Fixed factory overhead _2.50

  Total cost per unit P6.50

Should Paper Roses Boutique accept the special order made by the college? Show
computations, but a formal differential analysis report is not required. 

Answer:

Differential Revenue from accepting order

(4,000 x P6.00) P 24,000
Differential variable cost of additional units
(4,000 x P4.00) (16,000)
Differential profit from accepting offer P 8,000
 Paper Roses Boutique should accept the special order made by the college because they
will get P 8,000 as a differential profit from accepting the offer.
6. Stripe Company has been purchasing a component, Part Q, for P19.20 per unit. Stripe is
currently operating at 70% of capacity, and no significant increase in production is anticipated in
the near future. The cost of manufacturing a unit of Part Q is estimated as follows:

Direct materials P11.50

Direct labor 4.50

Variable factory overhead 1.12

Fixed factory overhead     3.15

Total P20.27

 Should the company make or buy the component? Prepare a differential analysis report
dated March 12 of the current year to support your answer.