Premium Essay

Differential Analysis

In: Business and Management

Submitted By xli12
Words 1278
Pages 6
Q U ES TI O N 1

Richardson Motors uses 10 units of Part No. T305 each month in the production of large diesel engines. The cost to manufacture one unit of T305 is presented below.
Direct Materials
Materials Handling
(20% of Direct Materials Cost)
Direct Labor
Manufacturing Overhead
(150% of Direct Labor)
Total Manufacturing Cost

$2,000
400
16,000
24,000
$42,400

Materials handling, which is not included in manufacturing overhead, represents the direct variable costs of the receiving department that are applied to direct materials and purchased components on the basis of their cost. Richardson's annual manufacturing overhead budget is one-third variable and two-thirds fixed. Simpson Castings, one of Richardson's reliable vendors, has offered to supply T305 at a unit price of $30,000.If Richardson Motors purchases the ten T305 units from Simpson Castings, the capacity Richardson used to manufacture these parts would be idle. Should Richardson decide to purchase the parts from
Simpson, the out-of-pocket cost per unit of T305 would
A.
B.
C.
D.

Decrease $6,400.
Decrease $4,400.
Increase $3,600.
Increase $9,600.
1 points

Q U ES TI O N 2

Axis Company produces 3 products on the same equipment. Demand has grown and adequate capacity doesn't exist to meet the market demand for all three. Axis has more equipment being installed, but capacity will not increase for four months. In the meantime,
Axis's management wants help in deciding how to allocate its scarce capacity. The following information is available:
Product
Sales Revenue
Variable Costs
Allocated Fixed Costs (not separable) Unit Profit
Minutes on Equipment

A
$20.00
9.50

B
$15.00
7.50

C
$12.50
5.00

9.50

7.50

6.50

$1.00
5

$0.00
2

$1.00
3

To maximize profits how should scarce capacity on equipment be used?
Product only A and C…...

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