Question

1.

Differential Analysis for a Lease-or-Sell Decision

Inman Construction Company is considering selling excess machinery with a book value of $281,900 (original cost of $400,000 less accumulated depreciation of $118,100) for $277,500, less a 5% brokerage commission. Alternatively, the machinery can be leased to another company for a total of $286,700 for five years, after which it is expected to have no residual value. During the period of the lease, Inman Construction Company's costs of repairs, insurance, and property tax expenses are expected to be $25,500.

a. Prepare a differential analysis, dated May 25 to determine whether Inman should lease (Alternative 1) or sell (Alternative 2) the machinery. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis
Lease Machinery (Alt. 1) or Sell Machinery (Alt. 2)
May 25
	Lease Machinery (Alternative 1)	Sell Machinery (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$	$	$
Costs
Income (Loss)	$	$	$

b. On the basis of the data presented, would it be advisable to lease or sell the machinery? Explain.

The net   from selling is $.

2.

Differential Analysis for a Discontinued Product

A condensed income statement by product line for Crown Beverage Inc. indicated the following for King Cola for the past year:

Sales	$233,100
Cost of goods sold	109,000
Gross profit	$124,100
Operating expenses	144,000
Loss from operations	$(19,900)

It is estimated that 16% of the cost of goods sold represents fixed factory overhead costs and that 19% of the operating expenses are fixed. Since King Cola is only one of many products, the fixed costs will not be materially affected if the product is discontinued.

a. Prepare a differential analysis, dated March 3, to determine whether King Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter zero "0". Use a minus sign to indicate a loss.

Differential Analysis
Continue King Cola (Alt. 1) or Discontinue King Cola (Alt. 2)
January 21
	Continue King Cola (Alternative 1)	Discontinue King Cola (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$	$	$
Costs:
Variable cost of goods sold
Variable operating expenses
Fixed costs
Income (Loss)	$	$	$

b. Should Star Cola be retained? Explain.

As indicated by the differential analysis in part (A), the income would   by $ if the product is discontinued.

3.

Make-or-Buy Decision

Companion Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $62 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 45% of direct labor cost. The fully absorbed unit costs to produce comparable carrying cases are expected to be as follows:

Direct materials	$24
Direct labor	21
Factory overhead (45% of direct labor)	9.45
Total cost per unit	$54.45

If Companion Computer Company manufactures the carrying cases, fixed factory overhead costs will not increase and variable factory overhead costs associated with the cases are expected to be 15% of the direct labor costs.

a. Prepare a differential analysis dated February 24 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the carrying case. If required, round your answers to two decimal places. If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis
Make Carrying Case (Alt. 1) or Buy Carrying Case (Alt. 2)
February 24
	Make Carrying Case (Alternative 1)	Buy Carrying Case (Alternative 2)	Differential Effect on Income (Alternative 2)
Sales Price	$	$	$
Costs:
Purchase price	$	$	$
Direct materials per unit
Direct labor per unit
Variable factory overhead per unit
Fixed factory overhead per unit
Income (Loss)	$	$	$

b. Assuming there were no better alternative uses for the spare capacity, it would   to manufacture the carrying cases. Fixed factory overhead is   to this decision.

Answer 1

Differential Analysis for a Lease-or-Sell Decision
Inman Construction Company is considering selling excess machinery with a book value of $281,900 (original cost of $400,000 less accumulated depreciation of $118,100) for $277,500, less a 5% brokerage commission. Alternatively, the machinery can be leased to another company for a total of $286,700 for five years, after which it is expected to have no residual value. During the period of the lease, Inman Construction Company's costs of repairs, insurance, and property tax expenses are expected to be $25,500.
a. Prepare a differential analysis, dated May 25 to determine whether Inman should lease (Alternative 1) or sell (Alternative 2) the machinery. For those boxes in which you must enter subtracted or negative numbers use a minus sign.
Differential Analysis
Lease Machinery (Alt. 1) or Sell Machinery (Alt. 2)
25-May
	Lease Machinery (Alternative 1)	Sell Machinery (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$  286,700.00	$ 277,500.00	$     (9,200.00)
Costs	$   (25,500.00)	$ (13,875.00)	$    11,625.00
Income (Loss)	$  261,200.00	$ 263,625.00	$      2,425.00
b. On the basis of the data presented, would it be advisable to lease or sell the machinery? Explain.
The net   from selling is $ 2425
2)
Differential Analysis for a Discontinued Product
A condensed income statement by product line for Crown Beverage Inc. indicated the following for King Cola for the past year:
Sales	$233,100
Cost of goods sold	109,000
Gross profit	$124,100
Operating expenses	144,000
Loss from operations	($19,900)
It is estimated that 16% of the cost of goods sold represents fixed factory overhead costs and that 19% of the operating expenses are fixed. Since King Cola is only one of many products, the fixed costs will not be materially affected if the product is discontinued.
a. Prepare a differential analysis, dated March 3, to determine whether King Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter zero "0". Use a minus sign to indicate a loss.
Differential Analysis
Continue King Cola (Alt. 1) or Discontinue King Cola (Alt. 2)
21-Jan
	Continue King Cola (Alternative 1)	Discontinue King Cola (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$  233,100.00	$                -	$ (233,100.00)
Costs:
Variable cost of goods sold	$   (91,560.00)	$                -	$    91,560.00
Variable operating expenses	$ (116,640.00)	$                -	$  116,640.00
Fixed costs	$   (44,800.00)	$ (44,800.00)	$                 -
Income (Loss)	$   (19,900.00)	$ (44,800.00)	$   (24,900.00)
b. Should Star Cola be retained? Explain.
Star Cola should be retained. As indicated by the differential analysis in part (A), the income would decrease  by $24900 if the product is discontinued.
3
3)Make-or-Buy Decision
Companion Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $62 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 45% of direct labor cost. The fully absorbed unit costs to produce comparable carrying cases are expected to be as follows:
Direct materials	$24
Direct labor	21
Factory overhead (45% of direct labor)	9.45
Total cost per unit	$54.45
If Companion Computer Company manufactures the carrying cases, fixed factory overhead costs will not increase and variable factory overhead costs associated with the cases are expected to be 15% of the direct labor costs.
a. Prepare a differential analysis dated February 24 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the carrying case. If required, round your answers to two decimal places. If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.
Differential Analysis
Make Carrying Case (Alt. 1) or Buy Carrying Case (Alt. 2)
24-Feb
	Make Carrying Case (Alternative 1)	Buy Carrying Case (Alternative 2)	Differential Effect on Income (Alternative 2)
Sales Price	$                 -	$                -	$                 -
Costs:
Purchase price		$        (62.00)	$          (62.00)
Direct materials per unit	$          (24.00)		$           24.00
Direct labor per unit	$          (21.00)		$           21.00
Variable factory overhead per unit	$            (3.15)		$             3.15
Fixed factory overhead per unit	$            (6.30)	$          (6.30)	$                 -
Income (Loss)	$          (54.45)	$        (68.30)	$          (13.85)
b. Assuming there were no better alternative uses for the spare capacity, it would be advisable to manufacture the carrying cases because the cost savings would be $13.85 per unit. Fixed factory overhead is irrelevant, since it will continue whether the carrying cases are purchased or manufactured.

B с D A Differential Analysis for a Lease-or-Sell Decision 2 Inman Construction Company is considering selling excess machinery with a book value of $281,900 (original cost of $400,000 les a. Prepare a differential analysis, dated May 25 to determine whether Inman should lease (Alternative 1) or sell (Alternative 2) t+ 4 Differential Analysis 5 Lease Machinery (Alt. 1) or Sell Machinery (Alt. 2) 643976 Lease Machinery (Alternative Sell Machinery (Alternative Differential Effect on Income 7 1) 2) (Alternative 2) 8 Revenues 286700 277500 =C8-B8 9 Costs -25500 --C85% =C9-B9 10 Income (Loss) =B8+B9 =C8+C9 =D8+D9 11 12 b. On the basis of the data presented, would it be advisable to lease or sell the machinery? Explain. 13 The net from selling is $ 2425 14 15 2) 16 Differential Analysis for a Discontinued Product 17 A condensed income statement by product line for Crown Beverage Inc. indicated the following for King Cola for the past year: 18 Sales 233100 10 19 Cost of goods sold 109000 20 Gross profit 124100 21 Operating expenses 144000 22 Loss from operations -19900 23 It is estimated that 16% of the cost of goods sold represents fixed factory overhead costs and that 19% of the operating expenses 24 a. Prepare a differential analysis, dated March 3, to determine whether King Cola should be continued (Alternative 1) or discontin 25 Differential Analysis 26 Continue King Cola (Alt. 1) or Discontinue King Cola (Alt. 2) 27 43851 Continue King Cola (Alternative Discontinue King Cola Differential Effect on Income 28 1) l(Alternative 2) (Alternative 2) 29 Revenues =B18 0 =C29-B29 30 Costs: 31 Variable cost of goods sold --(B19*(1-16%)) 0 =C31-B31 32 Variable operating expenses --B21*(1-19%) 0 =C32-B32 33 Fixed costs --((B1916%)+(B21*19%)) =B33 =C33-B33 34 Income (Loss) =SUM(B29:B33) =SUM(C29:C33) =SUM(D29:033) 35 36 b. Should Star Cola be retained? Explain Star Cola should be retained. As indicated by the differential analysis in part (A), the income would decrease by $24900 if the 37 product is discontinued.


А B с D 39 3)Make-or-Buy Decision 40 Companion Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $62 per unit. 41 Direct materials 24 42 Direct labor 21 43 Factory overhead (45% of direct labor) 9.45 44 Total cost per unit 54.45 45 of Companion Computer Company manufactures the carrying cases, fixed factory overhead costs will not increase and variable fac 46 a. Prepare a differential analysis dated February 24 to determine whether the company should make (Alternative 1) or buy (Alteri 47 Differential Analysis 48 Make Carrying Case (Alt. 1) or Buy Carrying Case (Alt. 2) 49 43885 Make Carrying Case (Alternative 1) 0 Buy Carrying Case (Alternative 2) 0 Differential Effect on Income (Alternative 2) 0 -62 50 51 Sales Price 52 Costs: 53 Purchase price 54 Direct materials per unit 55 Direct labor per unit 56 Variable factory overhead per unit 57 Fixed factory overhead per unit 58 Income (Loss) -24 -21 =B55°15% --(B43+B56) =B51+SUM(B53:357) =C53-B53 =C54-B54 =C55-B55 =C56-B56 =C57-B57 =D51+SUM(D53:057) =B57 =C51+SUM(C53:C57) b. Assuming there were no better alternative uses for the spare capacity, it would be advisable to manufacture the carrying cases because the cost savings would be $13.85 per unit. Fixed factory overhead is irrelevant, since it will continue whether the 59 carrying cases are purchased or manufactured. 60