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When completing a differential analysis, when are the differences shown as positive amounts? As negative amounts?

Short Answer

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Answer

Ifrevenues increase from alternative one to two, it is positive, and ifrevenue decreasesfrom alternative one to two, it is shown as negative.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Differential Analysis

Differential analysis refers to the technique used by business entities to make decisions that examine thebenefits and costs associated with the two available options and compare thenet results.

02

Negative and positive amounts in differential analysis

When completing adifferential analysis, the differences are positive if the revenues or expenses from the second alternative are greater than the first alternative.

In addition, the differences are shown as negative if revenues or expenses from the second alternative are less than the first alternative.

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Most popular questions from this chapter

What is the decision rule for selling a product as is or processing it further?

List the four steps in short-term decision making. At which step are managerial accountants most involved?

What questions should managers answer when considering dropping a product or segment?

Members of the board of directors of Security Team have received the following operating income data for the year ended March 31, 2018:

SECURITY CHECK

Income Statement

For the Year Ended May 31, 2018

Product Line

Industrial Systems

Household Systems

Total

Net Sales Revenue

\( 300,000

\) 330,000

\( 630,000

Cost of Goods Sold:

Variable

35,000

42,000

77,000

Fixed

210,000

63,000

273,000

Total Cost of Goods Sold

245,000

105,000

350,000

Gross Pro๏ฌt

55,000

225,000

280,000

Selling and Administrative Expenses:

Variable

66,000

77,000

143,000

Fixed

39,000

28,000

67,000

Total Selling and Administrative Expenses

105,000

105,000

210,000

Operating Income (Loss)

\) (50,000)

\( 120,000

\) 70,000

Members of the board are surprised that the industrial systems product line is losing money. They commission a study to determine whether the company should drop the line. Company accountants estimate that dropping industrial systems will decrease fixed cost of goods sold by \(81,000 and decrease fixed selling and administrative expenses by \)15,000.

Requirements

1. Prepare a differential analysis to show whether Security Team should drop the industrial systems product line.

2. Prepare contribution margin income statements to show Security Teamโ€™s total operating income under the two alternatives: (a) with the industrial systems line and (b) without the line. Compare the difference between the two alternativesโ€™ income numbers to your answer to Requirement 1.

3. What have you learned from this comparison in Requirement 2?

Snappy Plants operates a commercial plant nursery where it propagates plants for garden centers throughout the region. Snappy Plants has \(5,100,000 in assets. Its yearly fixed costs are \)650,000, and the variable costs for the potting soil, container, label, seedling, and labor for each gallon-size plant total \(1.90. Snappy Plantsโ€™s volume is currently 500,000 units. Competitors offer the same plants, at the same quality, to garden centers for \)4.25 each. Garden centers then mark them up to sell to the public for \(9 to \)12, depending on the type of plant.

Requirements

1. Snappy Plantsโ€™s owners want to earn a 11% return on investment on the companyโ€™s assets. What is Snappy Plantsโ€™s target full product cost?

2. Given Snappy Plantsโ€™s current costs, will its owners be able to achieve their target profit?

3. Assume Snappy Plants has identified ways to cut its variable costs to \(1.75 per unit. What is its new target fixed cost? Will this decrease in variable costs allow the company to achieve its target profit?

4. Snappy Plants started an aggressive advertising campaign strategy to differentiate its plants from those grown by other nurseries. Snappy Plants does not expect volume to be affected, but it hopes to gain more control over pricing. If Snappy Plants has to spend \)105,000 this year to advertise and its variable costs continue to be $1.75 per unit, what will its cost-plus price be? Do you think Snappy Plants will be able to sell its plants to garden centers at the cost-plus price? Why or why not?

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