Chapter 25: Q25-14RQ (page 1406)
When completing a differential analysis, when are the differences shown as positive amounts? As negative amounts?
Answer
Ifrevenues increase from alternative one to two, it is positive, and ifrevenue decreasesfrom alternative one to two, it is shown as negative.
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Heavenly Dessert processes cocoa beans into cocoa powder at a processing cost of \(9,700 per batch. Heavenly Dessert can sell the cocoa powder as is, or it can process the cocoa powder further into either chocolate syrup or boxed assorted chocolates. Once processed, each batch of cocoa beans would result in the following sales revenue:
Cocoa powder \)14,500
Chocolate syrup 103,000
Boxed assorted chocolates 204,000
The cost of transforming the cocoa powder into chocolate syrup would be \(72,000. Likewise, the company would incur a cost of \)183,000 to transform the cocoa powder into boxed assorted chocolates. The company president has decided to make assorted boxed chocolates due to their high sales value and to the fact that the cocoa bean processing cost of $9,700 eats up most of the cocoa powder profits. Has the president made the right or wrong decision? Explain your answer. Be sure to include the correct financial analysis in your response.
What is target pricing? Who uses it?
Cool Systems manufactures an optical switch that it uses in its final product. The switch has the following manufacturing costs per unit:
Direct materials \(5.00
Direct labor 3.00
Variable overhead 6.00
Fixed overhead 7.00
Manufacturing product cost \)21.00
Another company has offered to sell Cool Systems the switch for $15.00 per unit. If Cool Systems buys the switch from the outside supplier, the idle manufacturing facilities cannot be used for any other purpose, yet none of the fixed costs are avoidable.
Prepare an outsourcing analysis to determine whether Cool Systems should make or buy the switch.
Explain the difference between price-takers and price-setters.
Refer to Exercise E25-13. Assume that Video Avenue can avoid $39,000 of direct fixed costs by dropping the DVD product line. Prepare a differential analysis to show whether Video Avenue should stop selling DVDs.
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