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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

Brinn, located in Port St. Lucie, Florida, produces two lines of electric toothbrushes: deluxe and standard. Because Brinn can sell all the toothbrushes it can produce, the owners are expanding the plant. They are deciding which product line to emphasize. To make this decision, they assemble the following data:

Per Unit

Deluxe Toothbrush Standard Toothbrush

Sales price \(86 \)56

Variable costs 20 18

Contribution margin \(66 \)38

Contribution margin ratio 76.7% 67.9%

After expansion, the factory will have a production capacity of 4,100 machine hours per month. The plant can manufacture either 50 standard electric toothbrushes or 35 deluxe electric toothbrushes per machine hour.

Requirements

1. Identify the constraining factor for Brinn.

2. Prepare an analysis to show which product line to emphasize.

Explain why a segment with an operating loss can cause the company to have a decrease in total operating income if the segment is dropped.

What are sunk costs? Give an example.

Cold Sports manufactures snowboards. Its cost of making 2,000 bindings is as follows:

Direct materials \(17,510

Direct labor 2,600

Variable overhead 2,060

Fixed overhead 7,000

Total manufacturing costs for 2,000 bindings \)29,170

Suppose Topnotch will sell bindings to Cold Sports for \(15 each. Cold Sports would pay \)3 per unit to transport the bindings to its manufacturing plant, where it would add its own logo at a cost of \(0.50 per binding.

Requirements

1. Cold Sportsโ€™s accountants predict that purchasing the bindings from Topnotch will enable the company to avoid \)2,300 of fixed overhead. Prepare an analysis to show whether Cold Sports should make or buy the bindings.

2. The facilities freed by purchasing bindings from Topnotch can be used to manufacture another product that will contribute $3,100 to profit. Total fixed costs will be the same as if Cold Sports had produced the bindings. Show which alternative makes the best use of Cold Sportsโ€™s facilities: (a) make bindings, (b) buy bindings and leave facilities idle, or (c) buy bindings and make another product.

What is differential analysis?

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